IPO Launch: Rocket Companies Launches $3 Billion IPO

IPOStreet

Rocket Companies (RKT) aims to raise $3.15 billion from the sale of its Class A common stock in an IPO, according to an amended registration statement.

The company provides U.S consumers with home mortgages and other loan products via its digital lending platforms.

RKT is weathering the Covid-19 pandemic well and is expanding further into personal and automobile loan products.

Detroit, Michigan-based Rocket was founded as Quicken Loans and has rebranded to Rocket Loans (and various permutations for other service offerings).

Management is led by founder and Chairman Dan Gilbert and CEO Jay Farner who has been with the firm since 1996.

Below is a brief overview video of a Rocket Mortgage commercial:

Source: Rocket Mortgage

Rocket’s major funding partners are:

  • J.P. Morgan
  • Morgan Stanley

The company’s primary offerings include:

  • Rocket Homes & Mortgage - Home search and financing
  • Amrock - Title insurance and related services
  • Rocket Auto - Auto sales facilitation
  • Rocket Loans - Personal, unsecured loans
  • Lendesk - Canada
  • Edison Financial - Canada
  • Core Digital Media - Social and display lead generator

Rocket has received at least $3.6 billion from investors including Dan Gilbert through Rock Holdings [RHI].

The firm acquires customers through a range of online and offline lead generation activities as well as through partners.

RKT is active in offline advertising at major sporting events in sports such as basketball, golf, and football.

Marketing and Advertising expenses as a percentage of total revenue have been dropping as revenues have increased.

The Marketing and Advertising efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Marketing and Advertising spend, rose to 3.4x in the most recent reporting period.

According to a 2020 market research report, the global market for digital lending is forecast to reach $11.6 billion by 2025.

This represents a forecast CAGR of 20.3% from 2020 to 2025.

The main drivers for this expected growth are a desire by younger demographic consumers to utilize faster and more transparent online processes along with the lower processing cost to lenders.

Also, the market may be slowed somewhat by security issues related to new functionality development.

Rocket’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Fluctuating operating profit and margin
  • Variable cash flow

Below are relevant financial results derived from the firm’s registration statement:

rocketpl

Source: Company registration statement

As of March 31, 2020, Rocket had $2.3 billion in cash and $17.7 billion in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was negative ($4.8 billion).

RKT intends to sell 150 million shares of Class A stock at a midpoint price of $21.00 per share for gross proceeds of approximately $3.15 billion, not including the sale of customary underwriter options.

Class A and C common stock classes will be entitled to one vote per share and Class B and D classes will be entitled to ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of shares into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $39.5 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 7.55%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We intend to use the entire aggregate amount of the net proceeds from this offering to acquire a number of Holdings Units and shares of Class D common stock from RHI equal to the amount of such net proceeds divided by the price paid by the underwriters for shares of our Class A common stock in this offering (150,000,000 Holdings Units at the midpoint of the estimated public offering price range set forth on the cover page of this prospectus or, if the underwriters exercise their option to purchase additional shares in full, 172,500,000 Holdings Units). We do not intend to use any proceeds from this offering to acquire directly any Holdings Units and shares of Class D common stock from Dan Gilbert.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, Morgan Stanley, Credit Suisse, J.P. Morgan, RBC Capital Markets, Allen & Company, BofA Securities, Barclays, Citigroup, UBS Investment Bank, CastleOak Securities, Drexel Hamilton, Fifth Third Securities, Huntington Capital Markets, Loop Capital Markets, Mischler Financial Group, Nomura, Ramirez & Co, Siebert Williams Shank and Zelman Partners.

Commentary

Rocket is seeking public market investment as part of an expansion plan as it seeks greater market share and visibility in the online lending industry.

The firm has recently expanded its credit lines for increased loan origination activity so far in 2020 as interest rates have dropped.

Rocket’s financials show a somewhat uneven recent history but the company is on track to grow total revenue by about 5% in 2020 versus 2019, at the Q1 run rate annualized.

Marketing and Advertising expenses as a percentage of total revenue have been dropping; its Marketing and Advertising efficiency rate has increased markedly.

The market opportunity for online digital lending is large and expected to grow substantially through 2025 as younger demographic users hasten the transition to digital processing.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 85.1% since their IPO. This is a top-tier performance for all major underwriters during the period.

RKT has numerous competitors across multiple industry categories. Many of its most prominent pure-play competitors in the digital lending space are private companies, such as SoFi and NKBC Bank.

Additionally, traditional lenders are starting to move into digital lending to a greater degree, including Bank of America (BAC).

Rocket intends to expand further into personal and automobile lending, which should provide for further growth opportunities.

As to valuation, an NYU Stern School basket of publicly held regional bank stocks indicated an Enterprise Value / Sales multiple of 5.95x in January 2020.

Given its revenue trajectory and the potential for digital lending growth, RKT’s proposed EV/Revenue multiple of 6.74x is a reasonable valuation at IPO.

RKT has proven resilient in the face of the Covid-19 pandemic, and continued low interest rates for the foreseeable future will provide a floor to demand for new loans.

Accordingly, my opinion is a BUY at up to $21.00 per share.

Expected IPO Pricing Date: August 5, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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