Episode Details

Toast, Inc. (TOST) Q2 2026 — Revenue $1,908M, +23.1%, vs ~$1,873M consensus. GAAP diluted EPS $0.26 vs $0.13 (FactSet est $0.20) - the $0.34 in the data feeds is an adjusted figure Toast never published. Net income $154M. Adjusted EBITDA $221M. ARR $2,409M +25%. ~180,000 locations, record 9,500 net adds. GPV $60.7B. Free cash flow $130M vs $208M. FY26 guidance RAISED. TOST closed $33.81. Toast beat on revenue, beat on GAAP EPS, added a record 9,500 net locations and RAISED full-year guidance - and the stock did nothing. Underneath: the 34 cents half the wires printed is not what Toast filed (the release says $0.26), and free cash flow fell 37% in the quarter net income nearly doubled. THE CALL: HOLD (3/5, AN EXCELLENT BUSINESS, ALREADY PRICED LIKE ONE) — base-case value ~$32.0 vs ~$33.81 today. KEY METRICS: - CALL: HOLD 3/5, fair value ~$32 vs the $33.81 close (-5%). A 10-year DCF on OWNER free cash flow: start from Toast's own FY26 adjusted EBITDA guidance ($805-825M), charge stock compensation as a cost, then take out capex and the cash tax that arrives as the $982M loss shield burns off. 2027 owner FCF $646M, rising to $1,276M by 2031. At 10/11/12%: bear $21/$18/$17, base $38/$33/$29, bull $55/$46/$40; weighted 25/50/25 = ~$32. Our base-case enterprise value is $17.70B. The market is at $17.9B. One percent apart. The Street: Buy, $35.71. - WHICH EPS IS REAL. The release says, in plain English, 'Diluted earnings per share was $0.26 in Q2 2026' vs $0.13. Basic was $0.27. FactSet's GAAP estimate was $0.20, so the real print beat by 30%. The $0.34 carried in the data feeds (vs $0.3222 est) is an ADJUSTED figure - Toast published no non-GAAP EPS at all. Both bases beat. They are not the same number, and several outlets labelled the $0.34 as GAAP. - THE 26% MARGIN IS A DIFFERENT DENOMINATOR. Management's quote says GAAP operating margins 'expanded to 26%'. Operating income was $152M: on $1,908M of revenue that is 8.0%; on $595M of recurring gross profit it is 25.5%. Both disclosed, both consistent - but the headline margin excludes ~80% of Toast's revenue. Tax was $8M on $162M pre-tax = 4.9%, shielded by a $982M accumulated deficit that shrank $280M in six months. At 24% the quarter earns ~$0.21. - ALL THE GROWTH IS NEW DOORS. GPV $60.7B across ~180,000 locations = $337k per location per quarter, vs $338k a year ago ($49.9B / ~147,500). Flat, fractionally down. ARR per location $13,383 vs $13,068, +2.4% - so 22 of the 25 points of ARR growth is location count. Subscription per location +4.4%, payments +0.5%. Toast now needs ~38,000 new doors a year to hold this rate. The good news: payments gross profit take rate ROSE to 49.8 bps from 48.9. - WORST CASH QUARTER, BUT REAL QUALITY. Net income +93% to $154M; free cash flow -37% to $130M. Two lines: inventory took $81M in the quarter and $103M over six months ($114M to $217M, on hardware revenue up 2%), and deferred commissions took $93M - the cost of a record quarter of net adds. On quality Toast passes: stock comp plus payroll tax FELL to $58M from $64M (3.0% of revenue vs 4.1%), diluted shares fell to 590M from 605M after $486M of buybacks at ~$25.58, ROIC is 20.9% vs 10.4% at Shopify and 7.2% at Block, subscription ARR ($1,210M) just passed payments ARR ($1,199M) for the first time, and subscription gross margin hit 77.9%. What to watch: Changes our mind UP: ARR per location growing above 6% for two straight quarters, or free cash flow recovering as the $103M inventory build unwinds. Confirms the bear: net location adds under 8,000 a quarter, or the take rate breaking below 48 bps. We'd buy at $25-$27, where Toast retired 19M shares at $25.58. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.