Bed, Bath & Beyond (NASDAQ:BBBY) stock spiked 40% on Wednesday morning after Bloomberg Law reported the retailer was laying the groundwork for a bankruptcy filing. The company could enter receivership within several weeks, if not by this weekend.

At first glance, the price action seems almost incomprehensible. A bankruptcy should ordinarily wipe out shareholders, and BBBY seems like a case of retail traders throwing good money after bad.

Yet, these same risk-seeking traders bet that bankruptcy can save shareholders… and perhaps even reward them with enormous returns. When your share price borders on zero, even small increases turn into massive percentage gains.

In 2013, American Airlines (NYSE:AAL) shares rose more than 10x after rival U.S. Airways swooped in during the legacy carrier’s bankruptcy. And Hertz (NASDAQ:HTZ) shareholders saw a similar return after Knighthead Capital Management and Apollo Global Management injected $5.9 billion of equity in 2020. Surely, a similar white knight could save Bed Bath & Beyond and its shareholders too?

BBBY Stock: Teetering on Chapter 11 Bankruptcy

First, a little background about Chapter 11 bankruptcy.

In this type of insolvency, a company essentially admits it can no longer fulfill its debt obligations. The firm ends up in bankruptcy court, where a judge attempts to mediate a fair outcome for all stakeholders.

Usually, creditors will gain control of the company, give it a cash injection, and attempt to run it for as much profit as possible. They will then either 1) sell off the firm or 2) wind it down. (This differs from Chapter 7, a case that immediately shuts the business down for liquidation.)

Here’s where things get interesting for BBBY shareholders.

Ordinarily, a creditor will not find their newfound assets particularly enticing. Banks aren’t in the business of operating other businesses, and certainly not ones that fulfill wedding registries. To them, Bed Bath & Beyond looks like a collection of unprofitable stores expected to burn through $1.1 billion this year. These creditors will attempt to toss these assets as soon as possible.

That means creditors will likely force a sale… and probably at less than the $2 billion of debt BBBY has on its balance sheet. Potential buyers know that these debt holders would rather sell for $1.5 billion today than hold on and lose that $1.1 billion in negative cash flow. And they will squeeze the creditors for everything they’re worth.

In an expected case, common shareholders walk away with nothing. It’s exceedingly uncommon for bankruptcy judges to approve a plan where old shares are exchanged for new ones in the reorganized companies. And if senior debtholders have to take a haircut on a sale, the judge will ensure the pain is even worse for subordinated stakeholders.

However, “expected” isn’t the same as “actual.”

BBBY Stock: Will a White Knight Save Bed, Bath & Beyond?

In the real world, several surprising outcomes may happen.

First, a strategic buyer — also known as a “white knight” — might find more value in BBBY beyond its physical assets. Perhaps its brand name is worth something to them. Or assets like Buy Buy Baby are valuable enough to spin into a separate entity. If they bid $2 billion for the firm, that could theoretically wipe out all long-term debts, leaving shareholders with around $153 million of cash to divide among themselves. That values BBBY at 10x EV/EBITDA, a reasonable valuation for a brick-and-mortar retailer.

But what if a strategic buyer pays more than $2 billion? Thanks to the power of leverage, a $2.2 billion bid would leave $200 million for shareholders to enjoy, or $1.70 per share (a 3.7x upside). A $2.5 billion bid will give $500 million (a 10x upside), and so on.

Second, bankruptcy judges have offered lifelines to investors before. U.S. law allows equity security holders to vote in bankruptcy reorganization plans, and creditors might find it worthwhile to provide a token amount to shareholders and avoid drawn-out negotiations. BBBY has a significantly negative cash flow, so every additional day in court means losses for the creditors. Better to throw $160 million to equity holders and get the deal done today.

Finally, Bed Bath & Beyond might still pull an 11th-hour round of financing. The company managed to secure around $225 million in a stock offering in February. And if the past several years have taught us anything, it’s that the impossible can happen every day. (Perhaps Elon Musk would like to buy a competitor to Amazon (NASDAQ:AMZN)?)

What’s Bed, Bath & Beyond Stock Worth?

In my 2021 analysis of bankrupt Hertz, I created a relatively narrow range for the company’s assets. Used vehicles are a fairly liquid market, keeping accounting valuations close to real life. The only question was how far used car prices could rise.

Meanwhile, the value of Bed, Bath & Beyond is in the eye of the beholder. The company has few physical assets, so its value derives exclusively from the cash flows it can generate. In the eyes of a value investor, the company has no “intrinsic value.”

And that creates an enormous range of outcomes.

On the bullish side, we might assume that BBBY will secure financing and eventually resemble Target (NYSE:TGT) under proper management. Achieving a 3.5% operating margin should value the firm at around $5 billion in enterprise value, according to a three-stage discounted cash flow model (DCF). Assuming the firm took on another $1 billion in debt financing, deducting a total of $3 billion of debt leaves $2 billion in market capitalization, or $17 per share… a 50x upside!

On the more realistic end, Bed Bath & Beyond will struggle to secure financing and go bankrupt. Creditors will liquidate the firm for pennies on the dollar, and shares will be worth precisely zero.

It’s why Street estimates still peg BBBY’s fair value at $1.48, a 4x upside to today’s prices. Even though everyone expects the retailer to leave investors with zero, there’s still enough hope left with retail investors that the impossible may happen again.

On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.