BIGG Digital Assets is a buy, PI Financial says

Investors looking for a lower-risk way to play the emerging cryptocurrency space should be thinking about BIGG Digital Assets (BIGG Digital Assets Stock Quote, Chart, News, Analysts, Financials CSE:BIGG), says Kris Thompson, analyst for PI Financial. Thompson launched coverage of BIGG on Tuesday with a “Buy” rating and $3.00 target price, representing a projected one-year return of 81.8 per cent.

Vancouver-based BIGG owns Blockchain Intelligence Group, a developer of compliance, search and forensics security and accountability software, and Netcoins, an online cryptocurrency brokerage. Founded in November 2017 through a RTO of Blockchain Technology Group, BIGG then acquired Netcoins, now the company’s primary revenue driver, in August 2019. BIGG is currently the only publicly listed company in Canada involved in the trading of cryptocurrencies.

Thompson said BIGG has been actively working with Canadian regulators to help set up the nascent crypto environment, with BIGG applying in September 2020 for registration with the BC Securities Commission and the Canadian Securities Administrators to allow Netcoins to be registered as a Restricted Dealer in order to sell cryptocurrencies as a regulated market participant in all provinces. Thompson said while there’s no assurance that BIGG will receive this license, it is expected to be awarded by September of this year.

“In our view, investing in regulated trading platforms offers a lower-risk method of participating in the crypto economy versus investing in the underlying cryptos,” Thompson wrote. “In Canada, BIGG is one of the obvious investment candidates along this line of thinking. BIGG is a pioneer in this regard as the first (and only) publicly listed crypto trading platform in Canada.”

Thompson said BIGG’s asset-light model is primed to deliver significant operating leverage, pointing to US-based crypto exchange Coinbase, which had 1,249 employees by the end of 2020 while generating US$1.277 billion in revenue and a whopping US$527 million in EBITDA.

“While Coinbase has a longer operating history and offers more products (e.g., 45+ coins can be traded, Stake, Save, Store, Stake, Borrow and Lend solutions, operates in 100 countries), we expect Netcoins to expand its offering in similar fashion,” Thompson wrote.

“Coinbase saw 21 per cent of its retail investors engage with at least one non-investing product per quarter (e.g., Stake, Save, Spend, Borrow, Lend products) driving a 90-per-cent increase in net revenue from those investors,” he said.

BIGG’s first-mover status could be very significant, says Thompson, who outlined how the emerging cryptocurrency market in Canada resembles the story from cannabis, which has seen participants shrink from hundreds of black market operators just a few years ago to a smaller stable of players in the legal market. Moreover, the Ontario Securities Commission (OSC) asked in March of this year that crypto asset trading platforms must bring their operations into compliance or face regulatory action, with now over 70 such platforms having started compliance discussions.

“This regulatory process is likely to take many quarters, or even years to crystallize,” Thompson wrote. “Companies with larger resources, such as BIGG, that have years of financial audits under their belts, and large compliance teams, should be rewarded with regulatory approval ahead of others, or in the absence of many competing platforms. Then the question for BIGG is whether to acquire the struggling platforms, or acquire customers via marketing spend. Ultimately, we expect there will be far fewer participants.”

Thompson commented on BIGG’s being unable to file its 2020 audited financial statements within the mandated guidelines, saying this was due to rapid growth in trading volumes that overwhelmed the company’s auditors.

Thompson said this was “arguably a good problem to have had now that it’s in the rear-view mirror.”

“And BIGG has been anticipating a nod from the regulators for a number of months, the timing of which is out of the Company’s control. BIGG is growing fast, and adapting along the way to earn the confidence of investors. Our approach would be to allocate a partial position in advance of the expected Restricted Dealer license as we expect that to be a significant catalyst for the stock,” Thompson wrote.

BIGG’s share price started jumping this past December as prices for cryptocurrencies like Bitcoin started to grow. The stock hit a high of $4.72 on April 13 but has since dropped down to the $1.50-$2.00 range. Year-to-date, the stock is up about 215 per cent.

Thompson said BIGG has a strong balance sheet to support the company’s growth plans, with currently about $46 million in cash and about $22 million in cryptocurrency investments, three completed rounds of equity financings since November 2020 and a business that is close to operating at cash flow break-even over the first quarter of 2021.

By the numbers, Thompson thinks BIGG will generate 2021 and 2022 revenue of $27 million and $73 million, respectively, and 2021 and 2022 adjusted EBITDA of $8 million and $37 million, respectively.