Summary Bitcoin Depot operates the largest Bitcoin ATM network in North America, with over 6,400 kiosks. The company is on track to conduct over $700 million in transactions this year, although growth has disappointed. An uncertain growth outlook and competition from digital channels to acquire Bitcoin highlight the risks to the stock. Bitcoin Depot Inc. ( BTM ) operates the largest cryptocurrency ATM network in North America through more than 6,400 kiosks. The company became publicly traded following a SPAC merger IPO earlier this year. While the idea of converting cash for Bitcoin may seem rudimentary, there's a real business here with Bitcoin Depot currently profitable and on track to conduct over $700 million in transactions this year. That being said, growth has disappointed, with plenty of reasons to be skeptical of this model. As it relates to the stock, BTM is tiny with a current market cap of just around $150 million, down more than 30% since August. Still, we took a look, and our take is that there are enough positive developments to keep this story interesting. Ultimately, Bitcoin Depot is highly speculative but we believe 2024 will be a critical year for the company to define its long-term strategy. Data by YCharts BTM Financials Recap BTM reported its Q3 results with revenue of $179 million, up 3% year-over-year. Keep in mind that this figure captures the transaction volume of total customer Bitcoin purchases while its adjusted gross profit is likely a better measure of the "fee income" net the costs of sourcing the Bitcoin. For context, Bitcoin Depot charges a $3.00 per transaction fee while also offering Bitcoin at an up to 23% markup from quoted spot prices. Favorably, the adjusted gross profit at $27 million was up 29% year-over-year, also at a higher margin of 15% compared to 12% in Q3 2022. That strength flowed into a 17% increase in adjusted EBITDA to $14 million, while net income of $1 million fell from $3 million last year, reflecting an accounting adjustment to lease liabilities. source: company IR So while the numbers here are "solid", revenue came in below published estimates and also slowed compared to the pace in Q2. We can also point out that the level of transactions up just 3% y/y implies a decline in the number of transactions considering the price of Bitcoin ( BTC-USD ) during Q3 at ~$28k was up the $21k level in Q3 2023. Management has made a point of suggesting transaction volumes have been historically decoupled or uncorrelated with Bitcoin prices. This sounds great when the price of Bitcoin is falling, but it would be more encouraging to see a positive correlation, particularly in an environment where Bitcoin prices are rallying. source: company IR A theme for the company has been an expansion into its "BDCheckout" program now available at 5,400 retail locations across 29 states. Instead of the traditional "ATM kiosks", BDCheckout allows customers to purchase Bitcoin with cash at partner retail registers through an app-generated QR code. The idea here represents a new growth driver through a relatively limited capex requirement. In terms of the kiosk network, keep in mind that approximately 32% of all transactions are through locations connected with "Circle K" gas stations and convenience stores, a subsidiary of Alimentation Couche-Tard Inc. ( ANCTF ) which has embraced the technology with over 1,400 kiosk placements. The plan is to partner with new retailers following a similar model going forward as part of the growth strategy. Notably, Bitcoin Depot has a pending application to enter New York State, one of the few markets it currently does not have access to. source: company IR For the full-year 2023 pending the Q4 results, management is guiding for consolidated revenue between $700 million and $730 million, representing an 8% to 13% increase over 2022. The expectation is that an adjusted EBITDA of between $56 million and $59 million if confirmed, would represent a ~40% increase at the midpoint over 2022. On the balance sheet, the company ended the quarter with $30 million in cash against around $34 million in total debt. Considering the currently positive cash flow, we view the balance sheet position as stable. There is also a $10 million stock buyback authorization through June 2024. What's Next For BTM? The good news is that the ongoing rally in the price of Bitcoin above $40,000 is helping to revitalize interest in this segment following what was a historically volatile 2022. The bullish case for Bitcoin Depot over the near term is that sentiment begins to approach the speculative frenzy seen in 2020 or even going back to the big run in 2017 that brought a wave of new buyers and demand into the market. While we expect Bitcoin Depot to see some boost into 2024 based on current market conditions, this outlook for top-line growth of around 10% leaves a lot to be desired. Seeking Alpha What we want to see is a re-acceleration of transition volume, not just from the expansion efforts, but some indication that the ATMs are being used more often and by more people. On that point, consumers have an abundance of options in terms of methods for acquiring Bitcoin and cryptocurrencies, with the sense that physical ATMs are simply losing their importance compared to fintech players. Management explains that nearly two-thirds of users are using Bitcoin Depot kiosks for remittances, as a way of sending other people "money". With all due respect, there are better ways than paying a 23% markup. source: company IR We mentioned the stock's current market cap of $150 million. This figure considers the current outstanding 60.8 million share count. Keep in mind that Bitcoin Depot maintains outstanding share warrants, and earn-outs that are considered potentially dilutive above certain exercise prices and vesting levels. By this measure, we calculate a current enterprise value for the stock closer to $300 million. This means that with management's full-year adjusted EBITDA guidance, BTM is valued at approximately 6x forward EBITDA. While this level can be considered "cheap", the argument we make is that the risk level and uncertainties over the long-term viability of the business model justify a discounted valuation. source: company IR It's difficult to look out 5 or 10 years from now and have some certainty that Bitcoin ATMs will still be a "thing". Not because Bitcoin will fail, but more of the fact that there are many other viable alternatives for consumers to acquire Bitcoin digitally and more effectively. We'd say that this is a tough business to invest in for the long run considering the competitive environment. Final Thoughts We rate BTM as a hold, taking a neutral view of the stock from the current level. The strong points here include the path to profitability, a solid balance sheet, and at least steady growth to support some intrinsic value in the share. On the other hand, we also believe there are better investment opportunities in the broader crypto sector. The main risk to consider is the possibility that operating and financial metrics underperform over the next several quarters. A scenario where the price of Bitcoin trades significantly lower for any number of reasons may also limit demand for ATM transactions and open the door for a leg lower in the stock. Financial margins and cash flow trends will be key monitoring points going forward.
