Is Toast Stock a Bargain AI Play After Its Latest Revenue Surge?

After its shares sank by more than 35% at the start of the year, Toast (NYSE: TOST) stock has come roaring back since the spring to near breakeven for the year.

The combination of mixed restaurant industry sales and the software-as-a-service (SaaS) sell-off contributed to its poor early stock performance, but the company itself continued to hit on all cylinders. That was seen again in the second quarter, with the restaurant software and payments company once again delivering strong results.

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An AI winner

While Toast had been dumped in the AI loser bucket with other software companies, that narrative makes even less sense for Toast. First, its focus is on a sprawling industry of millions of small and medium-sized restaurant operators that aren't particularly tech savvy. Frontier model companies aren't going to look to put together the salesforce to sell into this market, and these companies aren't going to vibe code their own solutions.

Meanwhile, Toast's own AI-powered solutions have been gaining traction. Its AI-powered marketing agentic AI tool Toast IQ Grow is on track to become its fastest-ever solution to reach $10 million in annual recurring revenue (ARR), as restaurants are seeing great outcomes with it. In addition, the company is looking to expand its agentic AI platform into other areas like payroll, scheduling, tax, and bookkeeping. Things like dynamic menu and margin optimization tools, and predictive labor scheduling can have big impacts for restaurant operators that survive on slim margins, and these are the types of modules that can really help grow its ARPU (average revenue per user) over the long term.

Toast's Q2 results once again showed the company is thriving, with its revenue climbing 23% to $1.91 billion. Subscription revenue jumped 28% to $290 million, while financial technology revenue rose by 23%. Toast's GPV (gross payment volume), which is the payments the company processes for its restaurant customers, increased by 22% to $60.7 billion. It had a 59-basis-point fintech take rate and a 50-basis-point payments take rate.

ARR, meanwhile, surged by 25% to $2.4 billion. For Toast, ARR is the sum of its annualized subscription revenue and the gross profit from its payment processing business. Because there is a wide gap in gross margin between its two main revenue sources (subscriptions and payments), this is considered the company's most important metric.

Toast added 9,500 new locations in the period, a new quarterly record. It now serves 180,000 locations, up 22% year over year.

Earnings per share (EPS) doubled from $0.13 a year ago to $0.26 in the quarter, although that included a $10 million tariff refund. Otherwise, it looks like adjusted EPS would have been around $0.24. Excluding the tariff refund, adjusted EBITDA jumped 31% to $211 million.

Looking ahead, Toast once again raised its full-year forecast. It now expects its 2026 subscription services and fintech gross profit to be in a range of $2.325 billion to $2.355 billion, representing 23% to 25% growth. That's up from a prior outlook of $2.29 billion to $2.32 billion and original guidance of $2.27 billion to $2.30 billion.

The company is looking for adjusted EBITDA of $805 million to $825 million, up from prior guidance of $790 million to $810 million and an original forecast of $775 million to $795 million.

For Q3, Toast projected subscription services and fintech gross profit of $615 million to $625 million, equating to 22% to 24% growth. It's looking for adjusted EBITDA to land in the $210 million to $220 million range.

Can the stock's momentum continue?

Toast continues to deliver strong results, with revenue growth consistently in the low 20% range and ARR growth in the mid-20% range. The company continues to do a great job of adding new locations, while it's been making great progress in newer areas like international, chains, and grocery stores, where aggregate ARR is projected to double this year to $200 million.

Toast stock now trades at an enterprise value-to-ARR multiple of below 8 times its 2026 ARR guidance. On a forward P/E basis, it trades at 20 times 2027 analyst estimates. That's still a great valuation for a company with Toast's consistent 20%-plus ARR growth and long growth runway. As such, the stock should have plenty of continued upside from here.

Geoffrey Seiler has positions in Toast. The Motley Fool has positions in and recommends Toast. The Motley Fool has a disclosure policy.