Hungry? Buy These 2 Restaurant Stocks Instead of Going Out to Eat - The Motley Fool

Dropping $100 or more while eating out isn't hard to do with a family. Even staying in and ordering delivery doesn't cut the price much. For under $100, an investor can purchase two stocks modernizing restaurants.

Olo (NYSE:OLO) provides a platform that makes online ordering and delivery seamless. On the flip side, Toast (NYSE:TOST) has many tools restaurants need like point-of-sale hardware and payroll. Both companies help fill your stomach, but can the stocks provide a more satisfying return?

Image Source: GETTY IMAGES.

1. Olo

Olo is powering the apps behind many recognizable restaurant brands. Dairy Queen, Wingstop, and Applebee's are just a few clients. If you've ordered online through a restaurant's app, chances are you've interacted with Olo's software. Additionally, Olo's product allows restaurants to offer delivery rather than going through a third party like DoorDash (NYSE:DASH). However, should a restaurant incorporate outside delivery services, Olo has a solution to integrate inventory and transactions into a point-of-sale system. In fact, Olo expanded its integration with Uber (NYSE:UBER), providing technology for the growing alcohol delivery space. 

The financials behind Olo back up the compelling story. During the second quarter, Olo's revenue increased 48% to $36 million. It also increased its footprint by 30% to 74,000 locations. Olo announced several new business partners, notably adding Grubhub (NYSE:GRUB) to its integrated platforms list.

As the world returns to normal, investors will have to keep an eye on delivery trends. While Olo is much more than delivery, patrons must continue ordering online for restaurants to justify Olo's cost. Keeping an eye on Olo's net revenue retention rate will provide insight into how its customers are expanding with the platform. As of Q2, it sits above 120%. If Olo can maintain this metric, it will be a strong stock market performer. 

2. Toast

Toast is even more integrated into a restaurant's business. With payroll, marketing, point-of-sale hardware, and online ordering, Toast's platform caters to smaller establishments. Its 48,000 locations and 29,000 customers compute to 1.7 restaurants per customer.

Diversification is key for Toast, as 60% of restaurants close within the first year and 80% don't make it to five. Yet Toast has maintained a net revenue retention rate above 110% since 2015. This statistic includes closed businesses that don't pay Toast anymore.

The restaurant business is difficult due to its slim profit margins; Toast says the average is between 3% to 5%. To help out, Toast offers many services at a loss.

Category	Subscription Services	Financial Tech Solutions	Hardware	Professional Services
Revenue	$101,374	$644,372	$63,968	$13,420
Cost of revenue	$39,730	$508,816	$85,013	$45,558
Gross margin	60.8%	21.5%	(32.9%)	(239.5%)

SOURCE: TOAST. VALUES IN THOUSANDS.

The two negative categories, hardware and professional services, both deal with getting customers up and running. Start-up costs are the most expensive, so Toast's incentives are aligned with its customers. As a restaurant succeeds, it continues paying subscription fees, and Toast takes a small cut each time a transaction is run through its point-of-sale system.

Toast has yet to report a quarter as a public company, but before debuting on the public market, it was generating an annualized recurring run rate (ARR) growth of 118% and gross payment volume (GPV) growth of 125%. However, these numbers are being compared versus COVID-19-affected quarters, a difficult time for restaurants. While GPV fell for obvious reasons during the pandemic, ARR continued growing. This demonstrates how vital Toast's platform is to restaurants.

Time to buy these stocks?

Olo is down 8% year to date but trades at an expensive price-to-sales ratio (P/S) of 31. Toast is down about 10% and has a P/S of 22; but, it just announced insiders can begin selling shares after Nov. 11. This will lead to heavy selling pressure and could drive near-term prices down a bit.

Both Olo and Toast are critical to restaurants. Once a customer gets on, it's difficult to leave. Each is a great buy, but investors should wait for some headwinds to occur for Toast. Olo is a good buy here if the general trend toward online ordering continues as the world returns to normal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.

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Hungry? Buy These 2 Restaurant Stocks Instead of Going Out to Eat - The Motley Fool
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