Bakkt: Universal Crypto Adoption Is Over

The direct fallout to Bakkt (NYSE:BKKT) from the collapse of FTX (FTT-USD) will likely be extremely limited as confirmed by its CEO Gavin Michael in a recently released statement. But FTX, the third largest crypto exchange in the world by volume, was one of the most prominent and visible crypto companies from an institutional perspective. Its collapse played out quickly, just over a week, and will come to define a watershed moment for an industry still under siege and reeling from a year that saw the failure of the Terra/Luna currency (LUNC-USD), the bankruptcy of Voyager Digital Ltd. (OTCPK:VYGVQ) and BlockFi, the liquidation of crypto hedge fund Three Arrows, and the implosion of market maker Alameda Research.

More pain is to come as retail investors rush to pull their crypto from centralized exchanges, sparking what many crypto analysts say will quickly become a series of cascading bank-style runs. 2022 was when crypto dreams died and Bakkt will likely suffer second-order effects. Core Scientific (CORZ), the largest Bitcoin miner in North America, has indicated that it might file for chapter 11 bankruptcy after running into financial difficulties and institutional crypto lender Genesis is teetering on the brink. A material consolidation of an ecosystem that has been in development for over a decade now looks like the most likely outcome as the tide goes out and crypto firms swimming naked get found out. The current conditions have already induced a material level of stasis with firms rushing to audit and then mitigate their exposure to peers.

Crypto Adoption From An Institutional And Retail Perspective Will Take A Hit

Bakkt is trusted by several financial services firms to deliver crypto capabilities to their customers. Its solutions need mainstream retail consumers to actually use Bitcoin and its crypto peers as a tangible medium for transactions. Indeed, the company’s Crypto Solution business integrates crypto seamlessly into banking apps and as a payment solution or rewards program. The growth of these solutions hinges on the mainstream adoption of crypto beyond just being a speculative tool kit to get wealthy.

Bakkt bears would be right to question how healthy the company’s business model is beyond the price oscillations of crypto. When the company last reported earnings for its fiscal 2022 third quarter, revenue came in at $12.9 million, up 41% over the year-ago quarter with transaction revenue from loyalty redemption driving most of this growth. Transacting accounts increased by 21% year-over-year to reach 678,000 with digital asset conversion volume reaching $182 million. This was a 73% year-over-year increase on the back of loyalty redemptions from the post-pandemic travel boom.

The company recorded operating expenses excluding impairment of $60 million, an increase from expenses of $39 million in the year-ago period. However, broader operating expenses including impairments rose to $1.61 billion due to a partial non-cash impairment charge on goodwill and other intangible assets on their balance sheet. Management during their earnings call stated the impairment charge came from a decline in their market capitalization and the impact of elongated timing for crypto product activations.

The company also closed a $200 million deal to acquire Apex Crypto. $55 million of this will be paid in cash with the remainder being contingent on the business achieving certain financial targets. Bakkt expects the deal to be accretive to revenue and EPS in the first full year following its closure. Synergies of between $20 million to $25 million are being chased through headcount and technology efficiencies.

The Crypto Winter Just Added Another Year

With an adjusted EBITDA loss of $30.7 million, up from a loss of $24.1 million in the year-ago quarter, the company will see its seemingly large cash and equivalents position get continually whittled down as the crypto winter proves persistent. Current revenue growth has to be commended, but subscription revenue is down over its year-ago period and the large increase in transaction revenue broadly came on the back of a year-ago comp that was still disrupted by pandemic-era travel restrictions.

Is Bakkt undervalued with an enterprise value that’s declined to $376 million? The 17% short interest in the company does not think so. Investor confidence in the entire crypto industry will suffer structural damage as a result of the FTX debacle and Bakkt will likely see new partnerships slow on the back of this. Further, with general consumer activity in the space tied at the hips to crypto winters and springs, the elongation of the current winter far into 2023 will render uncertain Bakkt’s future revenue trajectory.

2021 saw large-scale institutional crypto adoption as Bitcoin and its peers exploded to record highs and firms rushed to capitalize on the upside. The opposite now stands to happen following the fall of FTX. A large number of retail investors look set to only recover cents on the dollar of their FTX trading accounts with total losses for other institutional firms. The impact will be fear and retrenchment. Not just from a scramble to mitigate counterparty exposure but from the potential regulatory response. Bakkt’s 6.58x enterprise value to forward sales multiple leaves little room for execution failure and comes at a more than 117% premium to its sector average. The company remains an avoid.