Bernstein: Toast’s third-quarter profit beats expectations; margin expansion may slow in 2027

How was the quality of growth behind the third-quarter beat?

In the third quarter of 2026, Toast’s non-GAAP recurring gross profit was 642 million dollars, up 27% year over year and 3% above market consensus; adjusted EBITDA was 240 million dollars, up 36% year over year and 9% above consensus. Recurring gross profit includes gross profit from subscription services and fintech businesses.
Net store additions were about 8500 for the quarter, in line with buyer expectations; total payment processing volume rose 20% year over year to 61.8 billion US dollars, but was about 1% below market consensus. Payment processing volume per location fell 1% year over year, also about 1 percentage points below consensus.
Subscription services revenue rose 30% year over year to 317 million US dollars, while subscription gross profit grew 36%, faster than revenue and subscription annual recurring revenue. Management said AI tools handled an increasing number of customer-support tickets, an important factor in improving subscription-business margins.

The company maintained its framework for recurring gross profit growth of at least 20% in 2027, supported by increased market share in core markets, growth in average revenue per user, and contributions from new businesses. Management expects margins to expand only very gradually; Bernstein believes this may be slightly below the market consensus’s previous expectation of about 2 percentage points of expansion, measured by recurring gross profit.
The pace of investment is a key variable: the company plans to continue investing in AI products and tools, sales capacity, and Toast IQ Grow. Bernstein believes that new businesses serving large enterprises, international markets, and retail could continue to weigh on margins, with this impact extending to 2027 and possibly beyond.
The company has not yet provided formal guidance for 2027, which it plans to announce in February; it also announced that the current CFO will depart. Bernstein continues to rate the stock Outperform and maintains a price target of 45 dollars, but its concerns about competition, SaaS pricing, and reinvestment have increased.

Enterprise, international, and retail businesses took about four years in total to scale to 200 million US dollars in annual recurring revenue, and will double for the second consecutive year. Bernstein believes that market expansion beyond enterprise and international businesses still needs to be supported by more operating performance.
Management is optimistic about its AI product Toast IQ Grow: after the product’s full launch and the addition of three AI agents for marketing offers, reviews, and search optimization, its monthly price rose from 499 dollars to 699 dollars; the company sees it as the fastest path to 10 million dollars in annual recurring revenue by the end of 2026.
Bernstein is watching whether Toast can gain a competitive advantage in AI modules, and how human involvement and model-inference costs will affect the gross margins of these products.

The company expects subscription and fintech gross profit of 610 million to 620 million dollars and adjusted EBITDA of 200 million to 210 million dollars in the fourth quarter of 2026, with both midpoint estimates slightly above market consensus. Full-year adjusted EBITDA guidance was raised to 840 million to 850 million dollars, above the previous range of 805 million to 825 million dollars.
Hardware pressure is currently manageable, but memory supply remains uncertain. The company plans to maintain higher inventory and mitigate costs by using previous-generation hardware and lower-cost memory, as well as making spot purchases when opportunities arise. Management said it has a good handle on demand in 2027, while Bernstein believes memory costs in 2028 remain uncertain.