The stock market is having a fine year in 2023, reversing a brutal 2022. The S&P 500 index is up by 23% so far and the more volatile Nasdaq Composite has gained 52% as of this writing. Both market trackers are essentially back where they where at the end of 2021.
But some stocks didn’t get the 2023 memo about a robust recovery. Restaurant management expert Toast (NYSE: TOST) has seen its stock price trading sideways this year, resulting in a 47% drop over the past two years. Artificial intelligence (AI) specialist SoundHound AI (NASDAQ: SOUN) has posted a 19% price increase year-to-date, but the stock still trades 72% lower from a two-year perspective.
Both stocks are relatively new additions to the public stock market with initial public offerings (IPOs) in the last two years. For the most part, investors worry that Toast and SoundHound might not amount to much in the long run.
I disagree, though. These seemingly fresh-faced upstarts have actually been around for years, and I like where they are headed. In my eyes, Toast and SoundHound are top-tier tech stocks with bright futures. Here’s why they look like incredibly supercharged tech stocks to buy while shares are cheap.
Toast simplifies a complicated business
If you keep your eyes open around your local eateries, you may have seen Toast’s products and services. The company provides a comprehensive restaurant management platform that helps food service managers run their businesses.
When I say comprehensive, I mean it’s a top-to-bottom system that can do pretty much everything. Toast’s cloud-based software can manage menu and inventories, process customer payments, run payroll and scheduling for the staff, work up an effective marketing campaign based on recent business data, and much more.
The food service market is highly fragmented, and most restaurants use tools from many vendors to handle these critical tasks. In some cases, an overloaded laptop in the back room might manage an uncomfortable amount of essential processes on spreadsheets. Hand-written notes are another fairly common alternative. And when there is proper software to handle various pieces of the restaurateur’s operating pie, they usually weren’t designed to work together.
That’s where Toast steps in. Its modular platform can start with just a couple of functions, expanding to cover other processes as the business grows. There’s a free tier for single-location restaurants that want to try this solution at an ultra-low cost. The “core” package with most of Toast’s essential services runs $69 per month, and larger chains can negotiate custom deals.
And the company runs its own sales and marketing in a uniquely efficient way. Toast rarely runs nationwide ad campaigns. Instead, the company picks a couple of key markets to focus on, swaddles these hyper-local targets in hands-on sales efforts, and relies on strong word-of-mouth marketing springing from successful implementations.
This approach may sound like a mismatch with the huge and global restaurant market, but I think it’s an intelligent method. Twenty percent of the company’s new customers are referrals from existing clients. As a result, Toast is growing by leaps and bounds. Revenue rose 37% year over year in the recent third quarter, powered by a 46% increase in subscription-based sales.
Toast notched $3.6 billion in sales in the 12 months ending in September. The total available yearly revenue in the U.S. market stands at $55 billion, and the global opportunity is at least twice as large. Toast has been polishing its products since 2011, but this rowdy growth story has a long way to go.
Things will change when Toast runs out of easy-peasy sales to small and medium-sized restaurants, moving on to larger chains. And while it remains to be seen how well its solutions will work for customers on a completely different scale, the lessons learned in the early going should result in high-quality solutions for any type of client.
You don’t see a lot of high-octane growth stocks treading at merely 2.7 times trailing sales, but that’s where Toast stands today. That’s a no-brainer buy in my book.
SoundHound is teaching an old tool new tricks
You may think of SoundHound as a simple song-finding smartphone app that identifies tunes based on a quick analysis of a sound snippet. Unlike Apple subsidiary Shazam, the SoundHound tool doesn’t require the original tune, but can work with your own singing or humming in a pinch. That’s the power of SoundHound’s AI analysis, based on nearly two decades of research and requests.
But that app was never much of a moneymaker. In recent years, SoundHound sought to find new uses for the underlying technology. Now, the Houndify voice recognition platform provides voice commands and conversational AI experiences, typically as a feature in some other company’s offerings. The new business started in the auto industry with early clients such as Hyundai and Mercedes-Benz. Social media and media-streaming services soon followed suit, and SoundHound counted giants like Netflix and Snap among its clients by 2020.
And the ambition didn’t stop there. After adding $79 million of cash to its coffers through the IPO and a quick follow-on stock sale, the company extended its speech recognition and natural language interpretation tech to the restaurant industry. And, it’s a small world — Toast quickly invited SoundHound to support its point-of-sale systems. More recently, SoundHound introduced a more powerful voice recognition tool for the restaurant business, known as Employee Assist. Beyond taking orders, this platform delivers all sorts of information to staff and customers alike, all driven by accurate voice commands even in noisy environments. See, the music-matching expertise taught SoundHound some unique and helpful tricks.
So SoundHound is addressing several enormous markets at once, and is probably looking for more industry-specific ideas to explore. The company’s revenue growth is lumpier than Toast’s, which makes sense since the overall revenue streams are significantly smaller so far. Still, sales are soaring and bottom-line losses are shrinking as the business expands:
This stock is also a bit more expensive than Toast shares, changing hands at 14 times sales. That’s after a price drop of 86% from the all-time highs just after the IPO in May 2022. The stock is quite volatile, as befits a small-cap company with a fairly recent focus on actually making money.
But the company’s expertise is not in question and I love the steady inflow of fresh clients and entire industries in search of effective voice control solutions. This is another supercharged tech stock with tons of blue-sky growth ahead, as long as you can stomach the stock’s elevated volatility.
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Anders Bylund has positions in Netflix. The Motley Fool has positions in and recommends Apple and Netflix. The Motley Fool recommends Toast. The Motley Fool has a disclosure policy.
2 Supercharged Tech Stocks to Buy Without Any Hesitation was originally published by The Motley Fool
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