Bakkt: Inorganic Growth Efforts, Crypto Growth, And Undervalued

Summary Bakkt Holdings, Inc. anticipates enhanced revenue growth in 2023 and beyond due to the acquisition of Apex and potential new inorganic opportunities. The company expects to benefit from the growing international crypto market, new clients from various sectors, and agreements with large clients. Despite potential risks from failed restructuring efforts or regulatory changes, Bakkt is considered undervalued, with a beneficial outlook for 2023. Bakkt Holdings, Inc. ( BKKT ) recently announced that the acquisition of Apex and new inorganic opportunities may enhance revenue growth in 2023 and the coming years. I also think that internationalization efforts, clients coming from new sectors, and agreements with new large clients could bring substantial net sales growth. Yes, I see risks from the potential failed restructuring efforts executed in the last quarter or regulatory changes, however, BKKT does appear undervalued. Software Platform For Crypto And Beneficial Outlook For 2023 Bakkt connects the digital economy by offering a software platform for crypto and redeeming loyalty and reward points that are issued by clients to their customers. The company helps clients deliver new opportunities to their customers thanks to interactive web experiences or APIs. Source: Company's Website Bakkt believes that the company will most likely enjoy significant momentum growth thanks to the growth of the international crypto market. I believe that this is one of the reasons to have a look at the company's business model even if the company does not deliver a significant FCF margin right now. We are talking about a market that may be growing at close to 27.8% from 2022 to 2030. The global cryptocurrency exchange platform market size was valued at USD 30.18 billion in 2021 and is expected to grow at a compound annual growth rate of 27.8% from 2022 to 2030. The growing popularity of digital assets, such as cryptocurrencies and Non-Fungible Tokens, is anticipated to increase the demand for cryptocurrency exchange platforms. Source: Cryptocurrency Exchange Platform Market Size Report, 2030 With that about the growing market, I believe that the outlook appears beneficial. The company expects to report gross revenue close to $1.874-2.384 billion, and Apex Crypto sales would recover throughout 2023. Source: Quarterly Presentation Clean Balance Sheet As of March 31, 2023, the company reported cash and cash equivalents worth $50 million, with restricted cash of $19 million, cash held in escrow of $67 million, and accounts receivable of about $25 million. Also, with prepaid insurance of close to $18 million, safeguarding assets for crypto worth $26 million, property, equipment, and software worth $20 million, and goodwill of $15 million, total assets stand at close to $413 million. The asset/liability ratio stands at close to 4x, and the ratio of current assets/current liabilities is larger than 1x. In sum, I believe that the balance sheet appears very solid. Source: 10-Q With regards to the total amount of liabilities, Bakkt reported accounts payable and accrued liabilities worth $49 million, safeguarding obligation for crypto close to $26 million, and total liabilities of $115 million. Source: 10-Q DCF Model: M&A Integration, International Revenue, And New Clients From New Sectors Would Imply Significant Upside In The Stock Price Under my financial model, I assumed that Bakkt would successfully expand its crypto platform, and successfully invest in further trading capabilities. I also believe that the company could broaden its network with new clients, which would most likely serve as a revenue catalyst for the coming years. I think that the combination of the assets of Apex would be beneficial for Bakkt. In this regard, it is worth mentioning that Bakkt is adding close to 5.8 million accounts, and will most likely enhance the FCF margin of the company. Management provided a significant number of details about the integration with Apex in a recent presentation. I can feel the optimism from their recent slides. Source: Quarterly Presentation I believe that the most interesting thing about the acquisition is that Bakkt obtains access to a significant number of sectors. Many new players will most likely be able to try the platform offered by Bakkt, which would most likely multiply the opportunities for revenue generation. Source: Quarterly Presentation Further acquisitions are quite likely mainly because the balance sheet does not show a lot of debt, and management proved that it was ready to work inorganically. In addition, Bakkt noted that it is constantly looking for new acquisitions to make revenue growth more dynamic. I think that expectations of more inorganic growth may accelerate the expectations about future FCF growth and net sales growth. We will continue to be opportunistic and evaluate strategic acquisitions that have compelling benefits for our business. Source: 10-K . Under my DCF model, I would expect an increase in international revenue mainly coming from Asia, Western Europe, and the UK. In this regard, management noted that there is strong demand from clients all over the world thanks to new regulatory clarity in many countries. Source: Quarterly Presentation Additionally, I would be expecting further connections with new large clients. In this regard, it is worth noting that the company already works with massive corporations like MasterCard (MA), Visa (V), Global Payments (GPN), Fiserv (FI), and Caesar's (CZR). In my opinion, potential large clients will most likely be interested in Bakkt once they see that management already works with large and established partners. We partner with leading brands and expect to grow customers on our platform through those relationships. We have already built an extensive network of clients across numerous industries including financial institutions, merchants, and travel and entertainment. These clients include MasterCard, Visa, Global Payments, Fiserv, and Caesar's. We believe that this strategy will enable us to add transacting accounts and volume more quickly and more efficiently than a direct-to-consumer model, especially as a relatively young company operating in a space like crypto that may be novel to some users. Source: 10-k My financial model includes 2033 net income worth $36 million, 2033 depreciation and amortization of -$100 million, share-based compensation expense of close to $5 million, unit-based compensation expenses of $23 million, and deferred income taxes close to $125 million. Also, with 2033 changes in accounts receivable of about $8 million, 2033 prepaid insurance of close to $16 million, changes in accounts payable and accrued liabilities worth $43 million, and changes in debt due to related parties of -$19 million, 2033 net cash used in operating activities would be about $136 million. Finally, if we assume 2033 capitalized internal-use other capex of about -$39 million, 2033 FCF would be about $98 million. Source: My Financial Model If we assume a terminal EV/FCF of 25x and a discount close to 10%, the implied enterprise value would be close to $1.209 billion. Also, adding cash and cash equivalents close to $50 million, restricted cash of $19 million, and cash held in escrow worth $67 million, and subtracting safeguarding obligation for crypto worth $26 million and warrant liability of $1 million, the implied equity valuation would be $1.318 billion, and the fair price would be $4.95 per share. Source: My Financial Model Risks From Lack Of Customer Growth, And Lower Transacting In Crypto And Loyalty Points Taking into account the current state of Bakkt, I believe that the most worrying risk would come from a lack of new clients. Besides, if the number of transacting in crypto and loyalty points executed by each existing customer lowers for whatever reason, net sales expectations would also decline substantially. As a result, I think that we could expect lower FCF expectations and lower implied fair valuation. Management provided a full explanation of these risks in the last annual report. If we are not able to bring new clients onto the platform, many of whom will pay us subscription fees for our platform services, our revenue and business concern could be negatively impacted. Additionally, much of our future revenue depends on transaction fees earned from customers transacting in crypto and loyalty points and the margin we charge in connection with those transactions. If we are not able to continue to grow our base of clients, we will not be able to continue to grow our customer base, our revenues, or our business, which could negatively impact our business, financial condition, and results of operations and may cause us to be unable to continue as a going concern. Source: 10-k Bakkt will most likely offer new features and new additional applications in the platform. New features may not be appreciated by clients, or regulators may block some of the new functionalities that the company may want to offer. Lack of new innovations or failed new features would most likely lead to lower FCF growth and a lower implied price. We are working to expand our service offerings, including, for example offering crypto rewards. Our platform will require additional development in order to add all of the additional functionalities and features planned by our management and activate our service offerings. There can be no assurance that the additional functionalities and features currently planned for our platform will be successfully developed in a timely fashion or at all. The addition of functionalities to our platform may require regulatory approvals, may increase our regulatory obligations and the degree of regulatory scrutiny we face, and may make regulatory compliance more complex and burdensome. Source: 10-k In the last quarterly report, Bakkt included restructuring expenses that I did not see in the quarter ended March 31, 2022. Quarterly restructuring stood at $4.2 million. I would be worried about failed restructuring efforts. If talented personnel leave the company, Bakkt may suffer lower revenue growth in the coming future and even loss of know-how. The most worrying is that investors out there would most likely not know whether these initiatives will be successful. Source: 10-Q The company noted that restructuring expenses intend to simplify operations, and will focus on scalability and product development. In my view, investors will do good by looking carefully at the following lines. Restructuring expenses of $4.3 million during the three months ended March 31, 2023, consists of severance costs and accelerated vesting of non-cash compensation as part of our business simplification initiatives to focus on capabilities with strong product market fit and scalability. Source: 10-Q With regards to the equity structure, I do not like that the company came with different share classes, which most investors out there may not appreciate. In my view, it creates a lot of issues for professionals making calculations about the fair price. Many investors may not be interested in Bakkt because of its equity structure, which may lower the demand for the stock, and affect the cost of equity. Source: Quarterly Presentation Conclusion Bakkt may benefit from the growing cryptocurrency market, and with the acquisition of Apex, management expects revenue growth to increase in 2023. Additionally, management appears to be looking at new acquisitions, which may enhance future inorganic growth. I also think that further internationalization, new clients from new sectors, and additional features in the platform could accelerate organic growth from 2023. I do see risks from failed restructuring efforts, new regulatory changes, and failed M&A efforts, however, I believe that Bakkt appears a bit undervalued.