Bakkt: Q3 Earnings And TMTG Buyout Rumors

Summary Bakkt's stock surged due to buyout rumors involving Trump Media and Technology Group, despite ongoing financial challenges. Bakkt's Q3 earnings showed a 60% YoY top-line revenue increase, but the company continues to burn capital with a $27.4 million operating loss. Bakkt's long-term transacting account metrics are declining, with a 42% drop over the last year. Given the potential all-stock transaction, selling the buyout rumor is likely a more favorable outcome than the buyout itself for BKKT shareholders. For TMTG, the company has plenty of cash to do the deal without diluting DJT shareholders. An all-stock deal would be a savvy way to capitalize on a grossly overvalued stock. It's been over a year and half since I last covered Bakkt Holdings ( BKKT ) for Seeking Alpha. At the time of my prior article, I called the company a 'hold' and noted cash burn and US regulations as important problems Bakkt was facing: Without the central bank liquidity spigot, the retail investor demand for cryptos will likely be limited. Furthermore, without clearly defined regulatory parameters from the US government, institutional demand will likely be limited as well. In the twelve months following that article, shares of BKKT fell by over 80% before the company did a 1 for 25 reverse split in late April of this year. Today, we find the value of post-reverse split BKKT shares now right back where they were when I wrote that late April piece in 2023: Data by YCharts What changed? Well, Bakkt is now involved in a buyout rumor. And not just any buyout rumor; a buyout rumor that involves President Donald Trump's media company Trump Media and Technology Group (NASDAQ: DJT ). To put this in perspective, one of my primary concerns related to BKKT last year was the regulatory environment in the United States. To say that the regulatory environment will be changing in 2025 is likely an understatement. If the incoming president is indeed trying to buy a cryptocurrency business, it should be a clear indication that the next administration will not just be less antagonistic to digital assets, but even friendly. However, that alone does not necessarily mean BKKT is a buy on this possible deal and certainly not after such a sizeable run in response to the rumor. In this update, we'll briefly go over what we know about the reported buyout talks as well as look at Bakkt's recently released Q3 earnings report. Takeaways From The Buyout Rumor Speculation about Trump Media and Technology Group (TMTG from here) buying out Bakkt originated in a Financial Times article on 11/18/24 . The two sides are apparently in advanced talks according to two different sources claiming to be privy to the negotiations. We don't yet know what the proposed valuation of the buyout would be, but the deal would apparently be an all-stock transaction. I think this is quite telling. Data by YCharts The response to the buyout report from FT sent BKKT shares absolutely flying as the stock nearly tripled the day the FT piece came out. The market value of the company now stands at over $216.5 million. Interestingly, at $372 million in cash and equivalents at the end of September, TMTG has more than enough cash to make this deal without issuing equity at BKKT's current valuation. This is largely speculative as we don't even know for certain whether or not this rumor has any real legs, but if we assume TMTG does want to buy BKKT, the company would rather issue shares than use cash to buy a business that was valued at about $71 million prior to the FT report. One could probably view this as an indication that even TMTG believes its own equity is overvalued. Which really shouldn't come as a surprise as DJT shares are currently trading at about 9x book and 1,400x trailing twelve month sales. All this said, I do suspect there are legs to this rumor for two reasons. First, we know that Donald Trump's team has an interest in cryptocurrency -related businesses since it launched World Liberty Financial earlier this year and has used Polygon ( MATIC-USD )(POL-USD) to sell NFTs. Second, Bakkt issued a ' no comment ' statement following the rumor. If there was nothing to the rumor, I would think Bakkt would say as much. My spidey senses are telling me not only is there something to the rumor, but it's a distinct possibility that the leak may have come from Bakkt. Of course, that is just a guess on my part. I don't have any knowledge of the behind the scenes dealings whatsoever. But Bakkt is clearly benefitting from this speculated buyout more than TMTG if the market is any guide. Bakkt's Q3 Earnings & Balance Sheet Woes For the quarter ended September 2024, Bakkt Holdings reported $328.4 million in total revenue, an increase of 60% year over year. Loyalty services revenue came in at $12.1 million, down 7% from the prior year period. The company noted lower transaction volume as the primary reason for the declines in the loyalty business. Bakkt 10-Q Even before factoring in things like SG&A, Bakkt's crypto services business revenue of $316 million has a gross margin of about 1%. Which I'd say is in-line with what I've seen from retail-facing businesses from companies like Coinbase ( COIN ) but certainly not a huge driver of bottom-line performance. The company continues to burn capital simply by operating, if the $27.4 million Q3 operating loss is any indication. The good news is Bakkt's year to date operating loss at the end of September was only $81.2 million, compared with $149.4 million this time last year. Perhaps seeing the writing on the wall, Bakkt started exploring a 'wind down and dissolution' of Bakkt Trust due to a lack of traction in the market and because of the regulatory requirements associated with operating the business. The company said it's working on strategic alternatives for Bakkt Trust. The KPI graphs below have my crudely drawn arrows in green and red: Q3 KPIs (Bakkt Q3 Investor Deck) While Bakkt highlighted surging transaction volume in November, the company's long-term trend in transacting accounts has been rough. Despite 7% year-over-year growth in crypto-enabled accounts, transacting accounts declined 42% over that same time frame. YoY growth in assets under custody is mainly attributed to increased prices for the coins themselves. All things considered, I'm not surprised Bakkt is entertaining a buyout and I suspect a sale would be the best outcome for BKKT shareholders rather than another quarter of incinerating what little capital the company has left. Bakkt Q3 Earnings Deck At the end of September, Bakkt had just $29 million in cash and equivalents plus $6.7 million in available-for-sale securities. Total assets sat at $1.18 billion against $1.08 in total liabilities. If we strip out the $68 million in Goodwill from the $102 million in stockholder equity, I could argue BKKT shares are worth about $5.40. Investor Takeaways How one views this potential deal likely depends entirely on which side of this possible transaction readers fall on. Consider, Bakkt has no history of ever operating a profitable business, and there is very little in the way of tangible assets owned by the company. That said, TMTG could look at this purely as a 6.5 million client acquisition deal. That probably would have been more palatable at $71 million rather than $216 million. However, since it would be an all-stock deal, it still wouldn't really be that much dilution for DJT shares currently valued at over $7 billion. For BKKT shareholders, I'd argue it makes more sense to just sell this rip now. If we assume a deal happens, and you're getting newly issued DJT shares in exchange for BKKT shares, that may be a good enough reason to take the chips off the table before DJT equity falls back down to earth. I have no position in either stock, and am actually quite excited for a new regulatory regime in the United States. But I think both stocks are still sells on this rumored deal.