The pandemic has hit the restaurant industry hard in the United States. For chains and small business owners, sales still remain high before the pandemic. Eating out has changed and restaurants need new solutions to make ends meet.
This is why restaurant technology stocks have the potential to be excellent investments. Olo (OLO 4.08% ), Grill (TOST 4.74% )and To block ( BECAUSE -1.46% ) are three to watch in 2022. Here’s why.
Digital services are driving restaurant success
Restaurants tend to have low profit margins due to the competitive industry landscape and high food, labor and rent costs. In theory, technology can help these businesses reduce costs and expand their customer base, but many restaurant technology offerings make up a large percentage of every sale, leaving little, if any, leftover for the restaurant. himself.
Rather than taking a big bite out of every sale, Olo has built an impressive subscription platform covering all customer touchpoints, from dining to delivery. Structured primarily as a software-as-a-service (SaaS) business model, Olo divides its software modules into two basic categories: online ordering and delivery. It has also just launched a digital payment service (which is not SaaS), which could strongly contribute to Olo’s profitability.
Olo’s online ordering gives a restaurant the ability to maintain its brand image and manage customer relationships. Rather than having a restaurant list their menu and ordering features on a third-party site, Olo integrates with a business’s app or website. Digital ordering capabilities also extend to the physical dining room, integrating directly with point-of-sale (POS) systems, self-service kiosks and order queue management. When it comes to delivery, Olo helps restaurants provide flexible fulfillment by syncing with on-demand drivers from various sources for more affordable delivery costs.
Yet Olo’s share price has tumbled alongside other high-growth stocks, falling more than 60% since its spring 2021 IPO. With free cash flow of $14.4 million dollars last year, Olo’s profitability is low but achievable. Additionally, the company expects to grow sales by at least 30% in 2022, and is armed with $514 million in cash and cash equivalents and zero debt. Be sure to keep Olo on your radar as a restaurant industry software partner.
The “operating system” of the modern restaurant
While many businesses have yet to recoup all pre-pandemic sales, technology provider Toast reported that restaurants on its platform increased sales by 41% year-over-year in 2021. In fact, Toast customers did more business in 2021 than before the pandemic. : sales in the fourth quarter of 2021 were 6% higher on average than in the same quarter of 2019.
Toast attributes this recovery to technology that supports a hybrid dining model, mixing sit-down and take-out experiences. Toast’s point-of-sale hardware offers touchless or touchless dining experiences. Additionally, POS and mobile ordering devices improve restaurant worker productivity, helping customers get their food faster.
Toast sells its point-of-sale and mobile ordering hardware below cost, but the company’s recurring software revenue and digital payments are the real cash cows. Revenue from the company’s “fintech solutions” more than doubled in 2021, and highly profitable subscription services grew by 67%. Toast expects revenue growth of around 30% in 2022 as its payment and management software attracts more users.
Much like Olo, Toast stock has cooled since its IPO in September 2021. Today, the stock is down nearly 70% since its debut. Last year’s paltry free cash flow of negative $17 million likely spooked investors. But this small restaurant technology company has $1.27 billion in cash and short-term investments, and without debt, Toast has enough capacity to promote the expansion of its platform. If Toast can continue to grow, investors may soon be lining up to get a taste of this top-tier stock.
The intersection of digital sales, consumer engagement and financial reporting
All told, I’m personally not ready to pull the trigger on Olo or Toast. But that’s a different story with Block (formerly Square). The digital payments and fintech powerhouse increased its gross profit (which mainly excludes company results Bitcoin ( BTC -0.14% ) commercial services) at a rate of 62% last year to $4.4 billion. This growth is particularly impressive considering that Block is already processing tens of billions of dollars worth of transactions every quarter. The company is still spending heavily to promote expansion, but made unadjusted net income of $166 million in 2021.
Like Olo and Toast, Block has been battered in recent months, down 55% from its all-time high. But Block is a key partner for food and beverage companies of all sizes. In addition to digital payment services, the Block merchant ecosystem offers restaurants a variety of tools: customer rewards, financial reporting software, integration with other technology providers, and management of menus, website and online orders.
Notably, Block generates very little revenue outside of North America. If the company can replicate its success internationally (both with Square for merchants and Cash App for consumers), Block could have an incredibly long growth streak ahead of it.
Block’s work on the Bitcoin network could also be an important long-term development for restaurant owners and other small businesses. Digital payments make huge profits from the bottom line of a small operation. If Block can crack the code on using Bitcoin as a payment network, or simply help facilitate Bitcoin as an option for everyday online commerce transactions, it could reduce costs and speed up payment settlement times. payments for restaurants – and other businesses.
Even after the recent tech selloff, Block stock isn’t cheap. But the company has incredible momentum and a well-developed ecosystem of digital tools to help restaurants and bars navigate the digital age. I’m a buyer right now and can’t wait to see what Block does next.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.