What Toast's 40% Margin Target Means for a $1,000 Investment Today

Toast (NYSE: TOST) is an exciting company that provides digital restaurant management services for clients all over the world. It's been growing beautifully since it went public in 2021, and it has also become profitable.

Its stock, on the other hand, hasn't done very well for investors. It's down 17% from its first-day closing price and 6% this year.

However, management is confident in its future prospects, and the market might finally get on board as the company approaches its long-term goals. Let's see where a $1,000 investment could be over the next few years.

The linchpin in restaurant management

Toast provides a connected restaurant management platform that unifies all parts of the operation, from backroom financial services like supply orders and accounts payable to on-the-floor tools like digital menus and point-of-sale devices. This saves time and money.

For example, a placed order can go straight to the kitchen with a click, and the system integrates with many partner platforms, such as Uber Eats and American Express's Resy reservation platform.

Image source: Toast.

As a software-as-a-service (SaaS) company, Toast was on the receiving end of last year's backlash against SaaS companies. The market was worried that AI agents would replace, or at least damage, many of these companies. But Toast, like other SaaS powerhouses, is using AI to its advantage. It recently rolled out its artificial intelligence (AI) product, Toast IQ. It's an AI agent that can accomplish tasks, like updating menus, as well as comb through data and provide analysis.

Despite market worries, Toast continues to demonstrate strength. It added 9,500 locations in the 2026 second quarter, a record that surpasses the previous high by 1,000. It has a total of 180,000 as of the end of the quarter. Some of the new clients include bubble tea chain Kung Fu Tea and an expanded partnership with TGI Friday's locations in the U.K.

Annualized recurring run rate (ARR), its favored top-line growth metric, increased 25% year over year, and net income rose from $80 million to $154 million.

Reaching its 40% margin goal

Although revenue, or in this case ARR, and net income are standard operating metrics, management charts its progress by gross profit and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Management's goal is to keep overhead expenses down such that 40% or more of all gross profit converts to adjusted EBITDA.

In the second quarter, this ratio reach 37%, as gross profit streams increased 28% year over year and adjusted EBITDA increased 37%. CEO Aman Narang says the mature core is already above 40%, with spending on international, retail, and enterprise holding the companywide figure below it.

The company is investing in new products and new revenue streams outside restaurants. It sees substantial opportunities to expand existing client relationships by offering streamlined services, such as marketing.

It has already entered the supermarket space, and it sees opportunities in retail and other areas that it expects to become major growth drivers over the next three to five years.

The current framework supports rapid growth and modest margin expansion. This "keeps us on a path to 40% plus long-term adjusted EBITDA margins with the timing firmly in our control," according to CFO Elena Gomez.

It's ahead of schedule. In 2024, the margin was only 19%, and management laid out a trajectory to reach 30%-35% margin in 2026/2027. This implies that as gross profit increases, expenses like marketing and research and development decrease. According to the full-year outlook, it's aiming for 34.8%.

So how long will it take Toast to reach 40%? Management hasn't updated the timing for reaching this milestone, but given its performance so far, it could happen soon. If adjusted EBITDA growth continues to outpace gross profit growth, the margin will continue to expand. Management says that the new markets are larger than the core markets, which means ARR and gross profit could increase many times over today's levels, and stringent efficiency should lead to higher adjusted EBITDA. Over time, a $1,000 investment in Toast could increase many times as well.

American Express is an advertising partner of Motley Fool Money. Jennifer Saibil has positions in American Express. The Motley Fool has positions in and recommends American Express and Toast. The Motley Fool recommends Uber Technologies and recommends the following options: long January 2028 $15 calls on Toast. The Motley Fool has a disclosure policy.