Toast’s Mixed Earnings Stir Investor Reactions Amid Steady Location Growth

Understanding Wall Street’s Reaction to Toast’s Latest Financial Results

Mary Long: It sounds like Toast is expanding and performing well in terms of location growth. However, the stock price doesn’t reflect a value that seems justifiable. After their recent earnings announcement, I noticed the stock fell slightly during after-hours trading. What are Wall Street’s concerns with these results?

Tim Beyers: The main issue is with their earnings per share (EPS). Wall Street expected 17 cents per share, but Toast only reported about 6 cents. That significant miss raised eyebrows. EPS can be unpredictable, especially for growth companies, as the number of outstanding shares can change significantly due to hiring or equity issuance. Toast is actively hiring, particularly in engineering, contributing to this dilution in share count. Though the EPS didn’t meet expectations, I’m not overly concerned unless we see a dramatic drop in new locations or other critical metrics.

They have been consistently adding at least 6,000 net new locations each quarter. If that number were to dip drastically, it would raise serious concerns. But so far, this reaction, which includes a modest 4% drop this morning, doesn’t appear alarming.

Mary Long: I noticed a compelling testimonial on Toast’s website from Wayne Carrington, who owns RocnRamen in New Rochelle, NY. He claims that with Toast, his average check size increased by 15%, translating to an additional $120,000 in revenue yearly at full capacity. This emphasizes that Toast’s impact extends beyond backend efficiency to enhancing customer spending. Could you explain how Toast achieves that?

Tim Beyers: Certainly. Toast enhances customer experience through its advanced point-of-sale system. Recently, I visited a place that used their system, featuring a large touchscreen interface that effectively showcased the restaurant’s specials and high-margin items. This design encourages customers to order more profitable items, ultimately increasing the average check size. The elegant layout of the point-of-sale interface is pivotal in directing customer attention toward the restaurant’s best offerings, which contributes to enhanced revenue.

Mary Long: Let’s shift gears. The Wall Street Journal covered a story about Microsoft developing a chip that utilizes a new state of matter, which could be pivotal for quantum computing. What exactly is this new state of matter?

Tim Beyers: The new state of matter is labeled a topological superconductor, which isn’t easily categorized as a conventional solid, liquid, or gas. While this discovery sounds groundbreaking, its practical implications for Microsoft’s business remain unclear until it is applied in a commercially viable form. Quantum computing itself poses significant challenges due to the nature of quantum states, where particles can exist in multiple states simultaneously. For effective quantum operation, these states need to be stabilized, often requiring extremely low temperatures to minimize particle movement. The concept of a Majorana bound state within topological superconductors could introduce some predictability into this chaotic environment, a promising step in advancing quantum technology.

The Future of Quantum Computing: Insights and Implications

As the landscape of quantum computing evolves, recent discussions highlight the potential for increased predictability in quantum systems. This breakthrough hinges on new material innovations, such as topological superconductors. These developments may pave the way for more stable and reliable quantum computing, making it increasingly appealing to tech giants like Microsoft and Alphabet.

Despite the excitement surrounding these innovations, experts caution that widespread commercial viability is still a long way off. The complexity of creating a stable quantum system adds constraints to its immediate application. In a typical binary system, computational capabilities are limited; however, a quantum system can process far more variables—up to X raised to the power of ten or more. This exponential leap in computing power is why big companies are so interested in quantum advancements, particularly as the race for artificial intelligence accelerates. Microsoft and Alphabet, both heavily invested in AI, understand that superior computing power can be a game changer.

Mary Long: With such promising developments on the horizon, it’s clear we are in the early stages of this technology. Tim, your insights on the Majorana chip were enlightening, and I’m eager to hear from our material scientist and engineering-minded listeners. They can reach out to us at [email protected]. Thank you for bringing your expertise to this discussion before your morning caffeine!

Tim Beyers: I appreciate it, but as I mentioned, listen at your own risk.

Rick Engdahl: In other news, Schwab has recently enhanced its trading experience through Ameritrade. Visit Schwab.com/trading to discover the features of thinkorswim, a highly-rated platform designed to bring the market into sharper focus.

Mary Long: Moving to another topic, let’s discuss Roblox, a gaming company known for its younger user base but actively working to broaden its appeal. Fool analyst Kirsten Guerra joins me now for a closer look. Kirsten, since we are recording on Valentine’s Day, any poetic sentiments to share about Roblox?

Kirsten Guerra: I wouldn’t say I’m in love with Roblox, but my investments sure are reaping the benefits! The platform’s hands-off approach allows creators to thrive, similar to how YouTube operates.

Mary Long: For those newer to Roblox, could you clarify how it stands out compared to companies like Microsoft or Activision? What makes it unique in the gaming sector?

Kirsten Guerra: Unlike those companies that develop their own games and produce gaming consoles, Roblox doesn’t sell hardware. Instead, it allows users to create their own games, accessing it across various platforms like PC, mobile, and VR headsets. Roblox functions much like YouTube, offering a space for creators to develop and monetize content without directly managing game content themselves.

Mary Long: Roblox posted solid fiscal 2024 results earlier this month, with impressive growth metrics. Revenue for the fourth quarter increased by 32% year-over-year, while full-year revenue was up about 30%. Bookings rose 21% for the quarter and 24% for the year. Daily active users and engagement hours also rose significantly. What are your thoughts on these figures, Kirsten?

Kirsten Guerra: You covered many of the strong points, but it’s essential to consider the full picture. Daily active users increased by 19% year-over-year, which initially seems positive. However, there was a slight decline in daily users from Q3 to Q4. This dip is concerning, especially given that Q4 is often a peak season for user growth due to holiday gift cards. Roblox faced a ban in Turkey, contributing to this decline, but it remains unclear if this is a one-time dip or the start of a worrying trend. I’ll certainly be monitoring this in the upcoming quarters.

Mary Long: Thank you for dissecting those numbers, Kirsten. Context is crucial for understanding the health of a company like Roblox, especially regarding its increasing expenditures on stock-based compensation.

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Roblox’s Financial Landscape: Navigating Cash Flow and User Growth Challenges

Kirsten Guerra: When looking at Roblox’s operating cash flow, it raises some questions. Is this a red flag, or just a cautionary signal? What do you think about their current financial setup?

Kirsten Guerra: The company’s stock-based compensation has always raised a yellow flag for me. It’s been excessive. You mentioned a significant increase in free cash flow this year, which is worth acknowledging. Roblox has invested heavily in capital expenditures while expanding Roblox Cloud to support its immersive 3D experiences. They’ve maintained that as their data centers become more efficient, future spending will decline, leading to better free cash flow. So far, they seem to be delivering on that promise. However, part of this increase in free cash flow is also due to rising stock-based compensation—essentially a non-cash method to incentivize employees. While this is beneficial for a rapidly growing and unprofitable company like Roblox, it does dilute shareholder value. Recently, this dilution has reached 4.4% annually over the past three years, which I believe should ideally be below 3%.

Mary Long: Roblox is known for attracting a younger user base. What features make the platform appealing to kids?

Kirsten Guerra: Reflecting on my childhood, I spent hours typing on an old monitor using AOL Instant Messenger. Kids are social by nature, and they gravitate towards engaging, free platforms. Roblox stands out as one of the most immersive experiences available.

Mary Long: While Roblox is often associated with younger players, management highlights that over 61% of daily active users are over 13, and that number is rising. How is Roblox working to attract an older audience?

Kirsten Guerra: That’s a great point! Social networks often start with younger users and gradually transition to older demographics—Facebook is a prime example. Roblox aims to encourage the development of games that appeal to older audiences, such as sports, racing, and battle royale genres. They’re also enhancing their discoverability algorithms to ensure that when older users log in, they see games that suit their interests rather than those preferred by younger players.

Mary Long: Last October, Hindenburg Research published concerns regarding child safety on Roblox, as well as allegations of inflated user metrics. While these safety concerns are serious, what makes them seem more critical for Roblox compared to platforms like Snapchat or YouTube?

Kirsten Guerra: Safety is a universal concern across digital platforms. Roblox, however, offers one of the most immersive social experiences for children, which heightens these issues. Unlike platforms that primarily connect close friends, Roblox users often interact with strangers in a variety of environments. To address these risks, the company spent $915 million on infrastructure and safety in 2024. They’re also a founding partner of ROOST, which stands for Robust Open Online Safety Tools. This initiative includes AI tools for detecting policy violations in both text chat and voice communications. Roblox recognizes the potential risks and is committed to addressing them seriously.

Mary Long: Regarding the Hindenburg report’s claims about inflated metrics, Roblox has firmly rejected these allegations. How have you assessed these claims, especially after Hindenburg’s closure?

Kirsten Guerra: The credibility of short reports varies by the outlet. Hindenburg had some respect in the industry, but their closure shouldn’t be directly associated with the validity of their report. When it comes to short reports, we rely on third-party observations rather than insider insights. While I can’t confirm Hindenburg’s findings, it’s essential for investors to evaluate the credibility of such allegations and factor them into the risk versus reward evaluation for investing in the company.

Mary Long: Thank you, Kirsten Guerra. It’s always enlightening to discuss Roblox with you.

Kirsten Guerra: Thank you for having me, Mary.

Mary Long: As a reminder, the participants in this discussion may hold positions in the stocks mentioned, and the Motley Fool may have formal recommendations regarding them. Make sure to do your own research before making any investment decisions.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook, is a member of The Motley Fool’s board. Other board members include executives from Alphabet and Amazon. Kirsten Guerra has positions in Alphabet, Microsoft, and Roblox, while Mary Long holds shares in Roblox. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Roblox.

The views and opinions expressed herein reflect those of the author and do not necessarily represent those of Nasdaq, Inc.

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