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Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Equity Bottom-Up

<h3>KEY POINTS</h3>
<div></div>
<ul>
<li>3Q22 revenue grew 41% Y/Y, driven by strong digital asset conversions (up 73%) and transacting accounts (up 21%). The company had more than $273 million in cash and other highly liquid assets at the end of 3Q22. President and CEO Gavin Michael highlighted the company’s “initial activations with our crypto capabilities” and expectations to “bring even more of them to market in the near term.”</li>
<li>Michael also discussed the acquisition of Apex Crypto, which the company expects will accelerate its growth plans as it will significantly expand its client verticals and cryptocurrency product offering. The transaction structure links the value to Apex Crypto’s financial performance. Michael discussed how the $145 million in stock is contingent on Apex Crypto meeting aggressive gross profit growth target rates through 2025. Investors might view the deal structure as clearly intentional and the issuance of additional stock for the deal is highly dependent on strong performance by Apex Crypto. See detailed&nbsp;<a href="https://www.watertowerresearch.com/content/acquiring-apex-crypto-turnkey-crypto-investing-platform-to-drive-additional-scale" target="_blank" rel="noopener">note</a>.</li>
<li>The company also provided color on the expected financial benefits associated with the Apex Crypto acquisition. The acquisition has strong financial benefits and is expected to be accretive to adjusted EPS in the first full year following deal close. Operating margin should expand by at least 20% and growth should accelerate due to the acquisition. Excluding deal costs, free cash flow through 2025 should be ~$80 million from the acquisition and associated business restructuring initiatives.</li>
<li>As the company had previously disclosed, during the quarter, Bakkt took a non-cash goodwill and intangible assets impairments charge of $1,547.7 million in accordance with GAAP. Bakkt indicated that it does not reflect issues with core business fundamentals, which remain strong, and it has no exposure to FTX. The company also noted that ICE is its largest shareholder with 66% ownership, which is consistent from June 30.</li>
</ul>
<h2>EARNINGS SNAPSHOT</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/308/874/original/image_615126728241668133323672.png?1668133325" class="editor-image img-responsive" data-smartkarma-image-id="308874"></figure>
<p>Read all our reports and view fireside chats about&nbsp;Bakkt&nbsp;on our website.</p>
<h2>THE COMPANY</h2>
<p>Bakkt was formed in 2018, with a vision to connect the digital economy. Its platform operates at the intersection of cryptocurrency (“crypto”), loyalty and rewards, and payments. It is uniquely positioned to enable consumers, brands, and financial institutions to better manage, transact with, and monetize those assets in exciting new ways.</p>
<p>Bakkt’s institutional-grade technology platform is at the core of everything it does. It has thoughtfully built a unique and powerful platform, melding together institutional-grade loyalty services to complement its institutional-grade crypto capabilities.</p>
<p>The Bakkt platform provides end-to-end services for its partners, which includes easily digestible technology services, 24/7 customer support, and marketing playbooks. Bakkt’s customers include consumers, businesses, and institutions.</p>
<p>Businesses leverage Bakkt’s crypto-related capabilities to facilitate new assets acquisition and rewards opportunities for their customers. Its loyalty-related capabilities help businesses deepen their relationships with their customers. Bakkt enables institutions to trade crypto using Bitcoin futures contracts that are traded and cleared on ICE and to store Bitcoin and Ether securely in its custody warehouse.</p>
<p>Regulatory compliance first infrastructure is a differentiated strength of Bakkt. Borne out of NYSE-owner Intercontinental Exchange. Bakkt is secure and fully regulated, creating a significant moat that comes to the forefront when markets are in turmoil. Bakkt is one of less than 20 firms that have a New York Bitcoin license.</p>
<p>Bakkt is a digital asset platform B2B2C company with major partners already signed, including Mastercard, Finastra, Wells Fargo, Bank of America, Global Payments, and Fiserv. The company’s advantages are significant: (1) a scalable and flexible platform that provides a one-stop-shop for connecting crypto to banking; (2) a diverse business model that is not solely reliant on crypto; (3) high ease-of-integration software; (4) compliance driven in a highly regulated environment; (5) more than $315 million in cash and other highly liquid assets to continue investing and weather the crypto storm; and (6) key partner wins that point to a strong product and the right price.</p>
<p>On the 3Q22 earnings call, the company noted that as a result of its efforts to simplify its business, the completion of most large dollar investments in 2022 and the acquisition of Apex Crypto, it expects to implement a restructuring plan in 4Q22. This will result in a restructuring charge in 4Q22 and the company expects to see associated expense reductions from the restructuring in 2023. This action could be viewed as a positive as the company appears to be prudently managing its costs and cash usage in light of a challenging macroeconomic environment. The company recently announced the acquisition of Apex Crypto. See Figure 1 for updates and our detailed report&nbsp;here.</p>
<p>Figure 1: Apex Crypto Acquisition Update</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/308/875/original/image_737918593251668133362736.png?1668133364" class="editor-image img-responsive" data-smartkarma-image-id="308875"></figure>
<div class="content-remarks">
<p>Source: Bakkt</p>
</div>
<h2>VALUATION</h2>
<h2>Bakkt Trading In Line with Its Crypto and Digital Wallet Peers</h2>
<p>A hallmark of our research at WTR is that we do not offer specific stock recommendations and/or stock price targets. Our purpose is to help educate our readers about a company and some of the factors that we believe can be relevant to their choices about when and if to invest in a particular issue. We do offer data and graphs about how the stock has been valued historically—typically, using conventional metrics—and sometimes we present data and graphs that juxtapose historical valuations among issuers that are believed to be comparable.</p>
<p>Bakkt’s comparables include digital wallet and crypto companies, and other deSPACs. The comps have a median forward P/S that ranges from 0.5x for de-SPACs to 1.9x for crypto, while BKKT is trading at 1.6x. BKKT is trading near its 52-week low, roughly in line with its comps.</p>
<p>Figure 2: Bakkt Comp Table</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/308/876/original/image_126417340261668133395338.png?1668133397" class="editor-image img-responsive" data-smartkarma-image-id="308876"></figure>
<div class="content-remarks">
<p>Source: YCharts</p>
</div>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>John Roy, PhD, who is the writer of this report, covers the Technology sector for WTR. Mr. Roy, PhD and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS


3Q22 revenue grew 41% Y/Y, driven by strong digital asset conversions (up 73%) and transacting accounts (up 21%). The company had more than $273 million in cash and other highly liquid assets at the end of 3Q22. President and CEO Gavin Michael highlighted the company’s “initial activations with our crypto capabilities” and expectations to “bring even more of them to market in the near term.”
Michael also discussed the acquisition of Apex Crypto, which the company expects will accelerate its growth plans as it will significantly expand its client verticals and cryptocurrency product offering. The transaction structure links the value to Apex Crypto’s financial performance. Michael discussed how the $145 million in stock is contingent on Apex Crypto meeting aggressive gross profit growth target rates through 2025. Investors might view the deal structure as clearly intentional and the issuance of additional stock for the deal is highly dependent on strong performance by Apex Crypto. See detailed&nbsp;note.
The company also provided color on the expected financial benefits associated with the Apex Crypto acquisition. The acquisition has strong financial benefits and is expected to be accretive to adjusted EPS in the first full year following deal close. Operating margin should expand by at least 20% and growth should accelerate due to the acquisition. Excluding deal costs, free cash flow through 2025 should be ~$80 million from the acquisition and associated business restructuring initiatives.
As the company had previously disclosed, during the quarter, Bakkt took a non-cash goodwill and intangible assets impairments charge of $1,547.7 million in accordance with GAAP. Bakkt indicated that it does not reflect issues with core business fundamentals, which remain strong, and it has no exposure to FTX. The company also noted that ICE is its largest shareholder with 66% ownership, which is consistent from June 30.

EARNINGS SNAPSHOT

Read all our reports and view fireside chats about&nbsp;Bakkt&nbsp;on our website.
THE COMPANY
Bakkt was formed in 2018, with a vision to connect the digital economy. Its platform operates at the intersection of cryptocurrency (“crypto”), loyalty and rewards, and payments. It is uniquely positioned to enable consumers, brands, and financial institutions to better manage, transact with, and monetize those assets in exciting new ways.
Bakkt’s institutional-grade technology platform is at the core of everything it does. It has thoughtfully built a unique and powerful platform, melding together institutional-grade loyalty services to complement its institutional-grade crypto capabilities.
The Bakkt platform provides end-to-end services for its partners, which includes easily digestible technology services, 24/7 customer support, and marketing playbooks. Bakkt’s customers include consumers, businesses, and institutions.
Businesses leverage Bakkt’s crypto-related capabilities to facilitate new assets acquisition and rewards opportunities for their customers. Its loyalty-related capabilities help businesses deepen their relationships with their customers. Bakkt enables institutions to trade crypto using Bitcoin futures contracts that are traded and cleared on ICE and to store Bitcoin and Ether securely in its custody warehouse.
Regulatory compliance first infrastructure is a differentiated strength of Bakkt. Borne out of NYSE-owner Intercontinental Exchange. Bakkt is secure and fully regulated, creating a significant moat that comes to the forefront when markets are in turmoil. Bakkt is one of less than 20 firms that have a New York Bitcoin license.
Bakkt is a digital asset platform B2B2C company with major partners already signed, including Mastercard, Finastra, Wells Fargo, Bank of America, Global Payments, and Fiserv. The company’s advantages are significant: (1) a scalable and flexible platform that provides a one-stop-shop for connecting crypto to banking; (2) a diverse business model that is not solely reliant on crypto; (3) high ease-of-integration software; (4) compliance driven in a highly regulated environment; (5) more than $315 million in cash and other highly liquid assets to continue investing and weather the crypto storm; and (6) key partner wins that point to a strong product and the right price.
On the 3Q22 earnings call, the company noted that as a result of its efforts to simplify its business, the completion of most large dollar investments in 2022 and the acquisition of Apex Crypto, it expects to implement a restructuring plan in 4Q22. This will result in a restructuring charge in 4Q22 and the company expects to see associated expense reductions from the restructuring in 2023. This action could be viewed as a positive as the company appears to be prudently managing its costs and cash usage in light of a challenging macroeconomic environment. The company recently announced the acquisition of Apex Crypto. See Figure 1 for updates and our detailed report&nbsp;here.
Figure 1: Apex Crypto Acquisition Update


Source: Bakkt

VALUATION
Bakkt Trading In Line with Its Crypto and Digital Wallet Peers
A hallmark of our research at WTR is that we do not offer specific stock recommendations and/or stock price targets. Our purpose is to help educate our readers about a company and some of the factors that we believe can be relevant to their choices about when and if to invest in a particular issue. We do offer data and graphs about how the stock has been valued historically—typically, using conventional metrics—and sometimes we present data and graphs that juxtapose historical valuations among issuers that are believed to be comparable.
Bakkt’s comparables include digital wallet and crypto companies, and other deSPACs. The comps have a median forward P/S that ranges from 0.5x for de-SPACs to 1.9x for crypto, while BKKT is trading at 1.6x. BKKT is trading near its 52-week low, roughly in line with its comps.
Figure 2: Bakkt Comp Table


Source: YCharts

DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  John Roy, PhD, who is the writer of this report, covers the Technology sector for WTR. Mr. Roy, PhD and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Strong Customer Activity Drives Revenue +41% and Digital Volume +73%; Global Payments Pilot Launched