Shares of the digital asset marketplace and platform Bakkt (BKKT 5.49%) have taken off and are now up roughly 64% over the last week. The company, which went public last year through a special purpose acquisition company (SPAC), shot up in its early trading sessions and surpassed $42 per share. But as more shares flooded the market, the stock came tumbling down and at one point traded for less than $4 per share. Now trading back around $7.26, is the stock ready to explode again? Let's investigate.

A compelling use case

Bakkt has created a platform for consumers to keep all of their digital assets in one place. This doesn't just mean cryptocurrencies but also loyalty reward points, branded gift cards, video game assets, and eventually equities. The goal of the company is not only to make it easier for consumers to track and manage these assets but also to be able to convert and make better use of them.

Consumers can use Bakkt to buy and sell cryptocurrencies and then use those to purchase some everyday goods and services or to take advantage of exclusive offers from merchants. The platform is essentially encouraging people to use cryptocurrencies as a medium of exchange. Bakkt also opens its platforms up to merchants in order for them to better manage their liabilities from loyalty programs, interact with consumers, and accept alternative payments.

Person holding phone while sitting at table with computer open.

Image source: Getty Images.

For instance, Bakkt has formed a partnership with Starbucks that allows coffee drinkers to load their pre-paid accounts using Bitcoin on the Bakkt platform. This enables Bakkt users to more easily use their Bitcoin while allowing Starbucks to reap cost savings by not having to pay some of the typical fees associated with traditional card payments. Bakkt's goal is to add more retailers and users to the platform, which will increase engagement and create a network effect.

Bakkt also has a digital asset marketplace called the Bakkt Warehouse, which plays a key role in powering the platform. The Bakkt Warehouse is an institutional-grade custodian for holding Bitcoin for institutions and powering Bitcoin futures contracts. It also enables consumers to transact in Bitcoin in real time on the app. At the end of 2021, Bakkt added the ability for customers to use Ethereum for transactions on the app, and is hoping in the future to allow consumers to buy and sell equities and other financial instruments. The other interesting thing about Bakkt is that the company notes in its registration statement that it could play a key role "in the design, development, and operation" of central bank digital currencies for the U.S. or other governments.

I definitely like the platform Bakkt has built here. Once the company fully builds out the platform, a consumer could put all of their stocks, cryptocurrencies, reward points, and gift cards onto one platform with one password and the conversion process would likely be much easier and likely more cost-efficient as well. There also seems to be a lot of others that think Bakkt has a compelling use case, as the platform has signed partnerships with MastercardChoice Hotels, Google (Alphabet), and Fiserv.

Looking at the valuation

There is no shortage of great stories in the stock market. The question is whether Bakkt translate this compelling concept into a thriving business. Bakkt completed the merger with its SPAC last October and immediately shot up to an $11 billion market cap with its potential uses and big-name partnerships enthralling investors.

But like a lot of post-SPACs, the surge didn't last long because more shares flooded the market, essentially diluting shareholders and hurting supply and demand. The $11 billion market cap seemed pretty generous because Bakkt is not currently generating a lot of revenue. Through the first three months of 2021, the company has only generated about $26 million of net revenue and currently has about a $2 billion market cap.

The company makes the bulk of its revenue from transaction fees when users transact with digital assets through the platform. Bakkt had about 1.7 million transacting accounts at the end of Q3 of 2021. The company hopes to supplement revenue from transaction fees with platform subscription fees and service fees for customizing loyalty programs for corporate partners. 

Like most companies going public through a SPAC, Bakkt's projections are aggressive. The company is projecting $55 million of revenue this year, which it looks like it will miss based on the current run rate through the first nine months of 2021. Then net revenue is expected to jump to $224 million this year and surpass $500 million in 2025. Bakkt is also projecting to surpass 30 million users in 2025.

A bet on Bakkt is a bet on crypto adoption

I do like the platform Bakkt is building and think it can play a role in furthering the adoption of cryptocurrencies as a medium of exchange. But it is still a bet right now, and there are likely platforms that will be able to compete with Bakkt. After all, how many people do you know who go to the grocery store and buy a gallon of milk with Bitcoin? It certainly could happen and many companies clearly think we are headed that way, given some of the partnerships Bakkt has formed, but it is far from a sure thing.

The company will report earnings on Feb. 17, which will give us a better idea of how its actual trajectory looks this year versus its initial SPAC projections. If the results and guidance can further support Bakkt's projections, then the stock may pop because it's clear the market is already excited about the concept. But if the results do not support the previous projections Bakkt has laid out, then investors are really just buying the story at some pretty heavy multiples. There's nothing necessarily wrong with that, but it does leave investors susceptible to the kind of volatility and potential losses we have already seen Bakkt experience in its very short public life so far.