In January 2024, analysts at financial firm Baird named Toast(NYSE: TOST) as one of its top financial-technology stocks for the upcoming year. The team’s pick proved prescient. Shares of Toast climbed 100% in 2024, handily outpacing the S&P 500 index.
Toast wasn’t the only stock that doubled in value in 2024. Shares of Revolve(NYSE: RVLV) and On Holding(NYSE: ONON) also doubled last year, climbing 102% and 103%, respectively.
In reality, there are quite a few stocks that doubled or more in 2024. But I like grouping Toast, Revolve, and On together here because all three are lesser-known companies that are posting big gains. Here’s why the trio is up, and which one I believe is the best long-term stock to buy.
When interest rates were at zero, investors cared little about profitability since it was essentially free to borrow money. But as interest rates went up in recent years, investors suddenly became very concerned about a company’s bottom line. And this was a problem for restaurant technology company Toast considering it had a net loss of $275 million and $246 million in 2022 and 2023, respectively. But things have improved dramatically in 2024, leading to a more upbeat investor community.
Through the first three quarters of 2024, Toast has only registered a net loss of $13 million compared with a net loss of $231 million in the same period of 2023. And the reason for the dramatic turnaround is straightforward: The company’s revenue has rapidly increased, but management has held its operating expenses in check.
In reality, there are multiple operating expenses, and Toast hasn’t treated them all equally. To the contrary, its spending for sales and marketing has continued to rise — it’s up 14% so far in 2024. But its general and administrative expenses (corporate) are down 17%. In other words, the company is still willing to spend on growth, but it’s cutting corporate overhead where possible. That’s a solid approach to improving profits.
Third-quarter revenue for Toast was up 26%, which is a solid growth rate. And now it’s turning the corner on profitability as well. This combination is why the stock doubled in 2024.
Trading at roughly 1 times sales, Revolve stock started 2024 off at about its cheapest valuation ever. The digital-first fashion company is popular with Millennial and Gen Z shoppers, but its stock wasn’t popular with investors due to its growth that had screeched to a halt. But the stock more than doubled in 2024 as its top line headed higher once again.
To be clear, Revolve is a pretty good business. It’s not necessarily looking for mass appeal — its average order value is $303 as of the third quarter of 2024, which is somewhat pricey for widespread adoption. That said, its active customer base of 2.6 million is nothing to sneeze at and is still growing, climbing another 5% in the most recent quarter.
Moreover, by going after more of the high end of the apparel market, Revolve enjoys respectable profitability. The company has reported positive net income in every quarter since going public in 2019. And the company is debt-free with over $250 million in cash.
Indeed, the problem for investors with Revolve was its lackluster growth. But in Q3, the company’s revenue took a 10% jump, and management said that the fourth quarter was off to a better start than Q3. Considering it’s financially strong already, the stock is taking off now that its growth rate is accelerating.
When some prominent athletic footwear brands decided to more strongly embrace direct-to-consumer channels during the global pandemic, shelf space at shoe retailers was wide open for a company such as On to swoop in and take market share. Considering On’s net sales were up 69% and 47% in 2022 and 2023, respectively, it’s safe to say that it’s indeed taking market share.
Through the first three quarters of 2024, On’s net sales are up another 27% from the comparable period of 2023. To be clear, roughly one-third of the company’s sales are direct to consumer. That said, as a younger shoe brand, it doesn’t quite have the same name recognition as more established brands. But it’s quickly growing as its shoes get in front of more and more consumers.
In short, On’s net sales have roughly doubled in just the past two years. And with this rapid top-line growth, management has been able to charge full price for its shoes, boosting its gross margin to an all-time high above 60%. And it also sports a quality operating margin that’s already over 9%.
These are great-looking financials for On, and investors are understandably upbeat. Moreover, while On is getting bigger, the athletic shoe space is huge, and there’s still plenty of room for further market share gains from here.
I believe Revolve is a solid business, but I believe it’s going after a fairly narrow slice of the market. For me, the long-term upside is unclear. And even though growth has picked back up, a 10% jump in revenue is still fairly modest, further suggesting that growth is still strained. This eliminates Revolve stock as my pick here.
On clearly has growth and its financials are great. However, consumer tastes in shoes can change in unpredictable ways. In other words, it can be hard to establish a durable competitive advantage. And for this reason, I think it’s important to buy shoe stocks at reasonable valuations.
At 15 times sales, On stock does not trade at a reasonable valuation. It may still work out for investors. But there doesn’t seem to be much margin of safety here, which is why I also wouldn’t pick On stock today.
That leaves Toast stock as my pick for 2025. But I left off the best reason to be optimistic about its growth potential in the coming year. According to management, as its market saturation increases, it becomes easier to win over new business. In other words, as more restaurants start using its technology, it grows by word of mouth.
Toast is reaching the tipping point that management looks for in many markets around the U.S. right now. For this reason, I expect the company to sustain strong growth in the coming year and beyond. And if profits surge with greater efficiencies in the business, then the stock could have much more upside as well.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Revolve Group and Toast. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
