Analysis of Rocket Companies IPO

On August 6, 2020, Rocket Companies (RKT) became a publicly-traded company by having its initial public offering (IPO). This post will provide an analysis of Rocket Companies IPO. Will the company Soar to new heights or blow up shortly after launch? This post will hopefully provide some information to help you make that decision.

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Rocket Companies IPO

Rocket Companies IPO offered 100,000,000 shares of Class A common stock. The IPO price was set at $18 per share. The underwriters made $.41 per share or $40,500,000 for facilitating the IPO for Rocket Companies. This left $17.59 a share or $1,759,500,000 for Rocket Companies in additional capital.

It should be noted that the company reduced its offering from 150 million to 100 million shares. Not a big deal, but the reduced offering was due to lower share price expectations. Originally the share price was going to be $20 to $22 per share.

Leadership Team

Jay Farner is the CEO and has stated that numbers and money follow; they do not lead. This is profound from a CEO because so much focus is put on the numbers and money. His approach is more along the lines of Amazon in that it focuses on where Amazon will be rather than where it is.

Jay was a director of mortgage banking for Rock Financial before joining Quicken Loans in 1998. He served as Vice President of Web Mortgage Banking, President and Chief Marketing Officer for Quicken Loans.

The founder and chairman of Rocket Companies is Dan Gilbert, who is a pioneer in the digitization of mortgages. He launched Rockloans.com in 1999, which is what help set the foundation for the Rocket Mortgage we know today.

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Dan Gilbert and Warren Buffet are friends (good company for a leader of a company). The two have been business partners over the years, and Buffet has been quoted as an admirer of Gilbert’s business skills with Quicken Loans. Two business deals they did or tried to do together was the March Madness bracket challenge and then an attempt to buy Yahoo. On a non-business note, Buffet even joined Gilbert in pulling an April fool’s joke on Quicken Loans leadership that Berkshire bought the company.

Company Overview

Rocket is a Detroit-based company obsessed with helping Americans achieve homeownership and financial freedom. The process of buying a house is driven by innovative technology and the energetic “Rocket” brand, which is aligned with imagining fast mortgages.

Founded in 1985, Rocket consistently demonstrated its ability to launch new consumer experiences, scale and automate operations, and extend its proprietary technologies to partners. The flagship business, Rocket Mortgage, has provided over $1 trillion in home loans. Even more impressive, Rocket has improved its market share from 1.3% in 2009 to 9.2% in Q1 2020, a CAGR of 19%.

Analysis of Rocket Companies IPO

A significant milestone occurred in 2015 with the launch of the Rocket Mortgage’s online platform that revolutionized the mortgage process as the first end-to-end digital experience. Rocket Mortgage advantage is being the simplest and most convenient way to get a mortgage.

Technology has created an efficiency advantage in that loan processors for Rocket closed 6.7 loans per month when the industry average was 2.3 loans per month. Most recently, Rocket was able to get that average up to 8.3 loans per month per team member. This is considerably more efficient compared to the industry as one Rocket employee equals almost four employees in the industry, thanks to their technology.

Analysis of Rocket Companies IPO

Rocket continues to grow organically by building on the technology and advantages it already has. Amrock increases Rocket’s efficiency by providing title insurance services, property valuations, and settlement services. This enables Rocket to be an easy, quick, and efficient one-stop-shop for home buying.

Rocket’s Product Extensions are leveraging the mortgage technology to provide full financial services by servicing auto and personal loans. These massive markets, like the mortgage market, are fragmented, and Rocket seeks to gain market share similarly by replicating their mortgage playbook.

Another expansion opportunity that Rocket is working on is the Canadian mortgage market that is worth $761 billion. Rocket is aiming to achieve that with Lendesk and Edison, which are two Canadian mortgage startups in Canada that Rocket has invested in.  Lendesk and Edison are both working on simplifying the mortgage experience, and Rocket is working with them to leverage Rocket technology to achieve that goal faster.

 The Rocket Brand

The “Rocket” brand is believed to be a competitive advantage. Rocket is the only large loan company with digital brand recognition. It has invested over $5 billion into marketing to create this brand recognition that would be difficult for a competitor to replicate.

Analysis of Rocket Companies IPO

Some examples of the marketing campaigns are:

  • The Quicken Loans Billion Dollar Bracket for the NCAA Men’s Basketball Tournament, in collaboration with Warren Buffett;
  • The annual Rocket Mortgage Classic—the first-ever PGA TOUR event in Detroit;
  • Super Bowl ad, featuring actor Jason Momoa, was ranked the fifth-best Super Bowl ad by USA Today’s Ad Meter.
Ryan Armour makes quiet ace at Rocket Mortgage Classic

Company Financials

Rocket’s business is a little complicated and not quite a straight forward balance sheet, which totaled $21 billion at the end of Q1 2020. While that sounds amazing most of those mortgage loans are funded by liabilities, which does not equate to a significant equity amount on the balance sheet.

A positive is that Rocket has maintained steady margins with operating earnings reported:

  • 2017 – $772 million
  • 2018 – $615 million
  • 2019 – $898 million

The adjusted revenue figures in 2019 were $5.9 billion, which was pretty impressive, considering that it resulted in adjusted net earnings of $1.3 billion. That translates into an EPS of $0.70. Based on $18 a share that values shares at 25 times adjusted earnings reported last year.

First-quarter 2020 was terrific, with the company generating $2.1 billion and earning $650 million on that. If that was annualized, it would result in around a $1.35 EPS. The low-interest-rate environment has been driving revenue/business for Rocket.

Second-quarter 2020 has seen even higher refinance rates than in the first quarter. While this will continue to drive higher and higher earnings for Rocket, it is probably not sustainable. The question for Rocket is how quickly it can steal market share and fund loans with equity instead of a liability.

Risks

The IPO was well-timed as it is taking advantage of historic mortgage volumes driven by low-interest rates. The most significant risk is the fact that so much of their book is financed through liabilities that it creates a considerable amount of risk if mortgage payments turn delinquent.

The business is cyclical, so there will be ups and downs. This will cause the stock also to be volatile.

A Valuation Question

Is Rocket a tech company that is in the financial field, or is it a financial company that has a lot of tech? This is important to decide as from a financial perspective, Rocket is not the most fantastic company out there, but from a tech perspective, it can take over market share and dominate the market. It’s a value vs. growth question which plays into the quote from the CEO that numbers and money follow and do not lead.

Maintain a Combination of Growth and Value Mutual Funds —

A Word of Caution

Ensure you are buying the company due to fundamentals or the belief that it will grow in the future. Do not buy the hype! IPOs can be exciting, but that does not always translate to gains. Using Facebook as an example, it had an IPO launch at $38 a share, which dropped a few months later to $18. In the long term buying in at $38 in 2012 was the right decision considering it trades above $250 today. Just make sure your choice is sound for why you are buying shares and ignore the short term volatility.

Conclusion

The only thing concluded is that Rocket is a growing company that is focusing on growing more. It has focused on customer experience, technology, and brand recognition to gain market share. Now Rocket is a public company; it can access capital with more ease, which will probably improve its equity position.

IPOs are challenging to predict if it will be a good or bad investment. It is speculative at this point how the market will react but might be worth the gamble if you think the company will achieve its bold domination goals. Full disclosure I have initiated a speculative position in RKT.

Leave a comment below and tell me if Rocket is a value or growth stock as well as if it is a Financial or Tech company.

This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.

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