U.S. technology unicorn Toast filed a new S-1 document this morning detailing a higher IPO price range for its shares. The more expensive range indicates that Toast may be worth more in its debut than it initially expected, a bullish sign for technology companies more broadly.
Toast’s rising valuation may provide a boon to two different subsectors of technology: software and fintech. The restaurant-focused Toast sells software on a recurring basis (SaaS) to restaurants while also providing financial technology solutions. And while it is best known as a software company that dabbles in hardware, Boston-based Toast generates the bulk of its aggregate top line from financial services.
Software revenues are valuable thanks to their high margins and recurring structure. Toast’s financial-services revenues, by contrast, are largely transaction-based and sport lower gross margins. The company’s IPO price, then, could help the private markets more fairly price startups offering their own blend of software-and-fintech incomes.
The so-called “vertical SaaS” model, in which startups build software tailored to one particular industry or another, has become a somewhat two-part business effort; many startups today are pursuing both the sale of software along with fintech revenues. Toast’s IPO, then, could operate as a bellwether of sorts for a host of startups.
To see Toast raise its range, therefore, got our eyebrows up. Let’s talk money.
Toast’s new IPO range
From a previous range of $30 to $33, Toast now expects to price its IPO between $34 and $36.
Toast now expects its IPO price to clear its previous upper-end guidance at the low end of its new range. That’s bullish — and indicative of a thus-far receptive market for the company’s equity.
In simple valuation terms, Toast would be valued between $17.1 billion and $18.1 billion. Those figures are based on a share count of 502,593,550, which is inclusive of the company’s underwriter option to purchase shares at its IPO price.
If we turn to a fully diluted market cap figure, which includes shares like full-vested, but yet unexercised, stock options, the company’s valuation rises. Renaissance Capital estimated that Toast would be worth $17.9 billion on a fully diluted basis at the midpoint of $31.50 per share. Doing some simple math, Toast could be worth as much as $20.5 billion at $36 per share.
That’s a huge amount of coin.
Now that we have the boring math out of the way, we can have some fun. In its most recent quarter (June 30, 2021), here’s the Toast revenue breakdown:
- Software: $37.6 million.
- Fintech: $353.6 million.
- Hardware: $29.2 million.
- Services: $4.4 million.
Recall that the latter two categories are breakeven at best, which means that they are effectively paid-for sales and marketing work. We can discount them.
Looking at the first two revenue buckets, we can see that Toast is nearly 10x more fintech than software, meaning that much of the Toast scale that we have seen it display in recent quarters has come from its fintech work. But the company’s two different revenue lines are pretty distinct from a gross-margin perspective:
- Q2 2021 software gross margin: 66.2%.
- Q2 2021 fintech gross margin: 20.7%.
Or, Toast has to generate more than $3 in fintech-derived revenues to generate the same gross margin as $1 in software revenues. That, right there, is why software companies are worth so much. And so much more than their peers in other industries. They just shit out great revenues on the regular.
At a $20.5 billion valuation, Toast is worth 12.1x its annualized run rate set from its Q2 2021 aggregate revenue result. Which includes an ocean of non-software incomes. So how bullish does the market feel, with the company possibly being worth 12x or so its top line? Pretty fucking bullish, frankly.
This is not simply because public investors have decided that low-margin revenues are suddenly worth more than we might have expected; Toast’s recent growth rates have been spectacular, so we’re seeing a healthy premium for above-cohort top-line expansion at the company.
But even with that caveat, that a company with the vast majority of its revenues tracking at ~20% is able to derive a double-digit revenue multiple is pretty wild. Toast will have to post pretty damn strong growth numbers for it to keep its multiple up. But the market appears willing to take that risk.
For startups, the lessons here appear to be as follows:
- Majority-fintech revenues at low margins are a condemnation to single-digit, long-term revenue multiples.
- Growth really does absolve all sins.
More when Toast prices formally.