Toast Vs. Square (Block): If You Can Only Choose One Fintech Stock To Buy

A comparison of fintech firms Toast (TOST) and Block (XYZ) reveals a valuation disparity driven by growth and business models. TOST, a rapidly growing restaurant POS provider, trades at 16x gross profits with 35% YoY gross profit growth but lower 25.9% margins due to its payment facilitator model. Conversely, XYZ, a broader payment processor, trades at a significantly cheaper 4x gross profits with 40% margins, despite slower 9% gross profit growth. The analysis suggests XYZ is a more compelling investment due to its valuation and robust margins, even as TOST offers higher growth and potential for future margin expansion if it transitions to a payment processor.

Analysis

The fintech landscape presents a distinct growth-versus-value scenario when comparing Toast, Inc. (TOST) and Block, Inc. (XYZ). TOST is positioned as a high-growth market share leader in the restaurant point-of-sale (POS) sector, evidenced by its 35% year-over-year gross profit growth in the last quarter and management's full-year guidance of up to 27% growth. However, this growth comes at a premium valuation of 16x gross profits. A key factor influencing its fundamentals is its "payment facilitator" business model, which results in a lower gross margin of 25.9% as it relies on third-party processors. In contrast, XYZ, a diversified payment processor, exhibits more mature characteristics with slower gross profit growth of 9% at its Square segment but boasts a superior gross margin of 40%. This fundamental strength is not reflected in its valuation, which stands at a significantly lower 4x gross profits. The market appears to be pricing in TOST's potential to eventually become a direct payment processor, which could dramatically expand its margins, but the current four-fold valuation premium over XYZ is substantial. Meanwhile, XYZ offers investors tangible value through its aggressive share repurchase program and a potential near-term catalyst from its recent inclusion in the S&P 500 index.

Key Decisions for Investors

• Value-oriented investors may find Block, Inc. (XYZ) compelling due to its low valuation at 4x gross profits, high margins, and shareholder-friendly capital returns via aggressive buybacks.
• Growth investors focused on top-line expansion should consider Toast, Inc. (TOST) for its dominant position in the restaurant POS market and 35% gross profit growth, but must accept a premium valuation of 16x gross profits that hinges on sustained long-term performance.
• A key variable for TOST's long-term thesis is its potential transition to a direct payment processor; investors should closely monitor any strategic shifts or commentary from management that could unlock margin expansion from its current 25.9% level.
• Given the stark valuation gap, investors should weigh if TOST's superior growth outlook justifies its four-fold multiple premium over the more profitable and cash-generative XYZ.