Dan Gilbert's Rocket Companies IPO raises $1.8 billion, launches trading on Wall Street

Detroit billionaire Dan Gilbert celebrated his $1.8 billion Rocket Companies IPO Thursday by talking up the possibility of acquiring more financial-technology companies down the road. 

"We want to use our stock as currency and potentially acquire more fin-tech organizations and put them in the vault," Gilbert said on CNBC. "We're excited about it." 

Rocket stock began trading on the New York Stock Exchange Thursday around 11 a.m,. opening at the IPO price of $18 a share. The stock was gaining ground and trading around $18.65 a share shortly after 11:30 a.m. In early trading, the stock swung from a range of $17.50 a share to $18.91 a share. 

After 12:30 p.m, the stock was trading around $19.35 a share, up $1.35 or 7.5%.

Gilbert, who is recovering from what he called a right-brain stroke in 2019, also took time on CNBC to express his thanks to those who have helped him on his road to recovery. He noted that there are 1.5 million strokes every year in the United States.

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"It could have been worse, let's put it that way," Gilbert said.

Gilbert, Rocket's founder and chairman, was interviewed Thursday morning on CNBC along with Jay Farner, Rocket's CEO, before ringing the opening bell on the first day of trading for Rocket's stock.

The executives noted that the IPO puts stock in the hands of Rocket employees and will help strengthen the company's culture. They also maintain that the IPO positions the company for growth in the next five years to 10 years. 

While Wall Street seemed to question the tech-based appeal of a Detroitcompany that heavily advertises its Rocket Mortgage brand, Gilbert reiterated the company's digital-driven story.

"We think we're a technology company that happens to do home loans," Gilbert told CNBC. 

More:Rocket Companies IPO priced at $18 a share, far below earlier estimates

The IPO received a cooler reception than expected, raising $1.8 billion instead of a targeted $3.3 billion. Experts speculated that Rocket's IPO stock should be priced at a lower range, which would be closer to a consumer company or bank than a tech wonder. 

Many IPO shares have received an extraordinary boost in their first days of trading on Wall Street in 2020. 

Farner said the mortgage company, which now has close to 9% market share, is aiming to have 25% market share in the course of the next 10 years. 

"We're in great shape and more excited than ever about the future and think about the momentum we've got," Farner said on CNBC. "Record quarters, record profitability, record growth."

The Rocket IPO is the third-largest U.S. initial public offering so far in 2020. At $1.8 billion, experts say, the Rocket IPO ranks behind Royalty Pharma, which raised $2.175 billion in June. And it's behind the Warner Music Group, which raised $1.925 billion, also in June. 

That list excludes hugely popular offerings in so-called blank check companies, a term used for a development stage company that has no specific business plan or may plan future mergers. That group is also known as a special-purpose acquisition company. 

Hedge fund manager Bill Ackman's company Pershing Square Capital Management raised $4 billion in its offering in July. 

Rumors that billionaire Gilbert's privately held powerhouse would offer shares to the public began to swirl in early June. Some documents – known as a draft registration statement – regarding Rocket Companies were submitted confidentially  March 6 to the Securities and Exchange Commission, according to filings now listed at the SEC site. 

Then, Quicken took the first public step associated with offering stock to investors on the afternoon of July 7, when preliminary paperwork for an initial public offering was filed with the SEC.

The IPO market has been exceptionally strong. 

Through Aug. 4, there have been 93 U.S. IPOs raising $29.1 billion, according to Renaissance Capital, a provider of institutional research on the IPO market. 

The average first day pop has been 32.8% so far this year, well above the typical range of 13% to 15% range, according to Renaissance Capital's research. 

On average,  IPOs have returned 41% so far this year. And thus far, 64.5% of the IPOs done this year are trading above their IPO prices.

The IPO market, like many things, came to a halt in the spring after COVID-19 shut down much of the U.S. economy and sent the stock market spiraling downward. This summer, though, has looked remarkably brighter for stocks and IPOs. 

Unlike other IPOs, Rocket isn't an upstart but instead is a business that has been up and running for the past 35 years.

Instead of posting losses, like some other digital-driven IPOs, Quicken Loans has been profitable.

Quicken Loans originated $51.7 billion in home mortgages for the three months that ended March 31, according to the SEC filing. That represented an increase of $29.4 billion, or nearly 132%, compared with the three months that ended March 31, 2019.

For the first three months of 2020, the company had $97 million in net income, compared with a net loss of $299 million for the same period in 2019.

As a result, many Wall Street analysts had expected that the initial public offering would be well-received by institutional investors. Rocket executives said they were pleased with the investor base built with the IPO. 

"Rocket has developed a fast turnaround mortgage app that has helped it gain share from 5% of mortgage lending in 2018 to 8.7% in the first half of 2020," according to Kathleen Smith, principal at Renaissance Capital.

"Revenue and earnings have jumped dramatically and the management team is strong," she said.  "Dan Gilbert and Jay Farmer have done a great job building this company." 

Stock of other mortgage lenders, including Mr. Cooper and Flagstar Bancorp, have been doing well on Wall Street, too. Since mid-May, PennyMac Financial Services was up about 70%, Mr. Cooper was up about 100% and Flagstar was up 27%. 

But Smith noted that investors need to be aware in general that there are payouts to management. And cash flow for Quicken Loans is being hurt by COVID-related forebearances on mortgages. 

Smith said that because of its larger size, Rocket Companies will be a candidate for fast entry inclusion in the Renaissance IPO ETF, a basket of 40 of the largest companies that have gone public in recent years. 

The Renaissance IPO ETF tracks an index that is up 48% year to date, exceeding the 2% return for the Standard & Poor's 500 index. 

"This strong performance of the index is a good barometer of the health of the IPO market," Smith said. 

IPO shares often go directly to larger, institutional investors, leaving individuals to wait to often pay a higher price to buy shares once actual trading begins on the stock exchange. 

Now that Rocket stock is trading on the New York Stock Exchange, individuals might wonder if the stock is a good deal for them. 

The stock may turn into a boost for local employees. The SEC filing said that up to 5% of Rocket Companies Class A shares will be reserved for company directors, officers, employees and their family members. 

Even so, experts warn that individuals should be wary of being swept up in the IPO buzz of the summer. 

"If buying on the first day of trading, be careful about the price that you’ll pay as prices can be all over the place," warned Melissa Joy, president of Pearl Planning, a wealth adviser in Dexter. 

Joy is working with a client who is an executive at Quicken and may be receiving some stock compensation. 

"Employees who have the opportunity to invest in the company will want to make sure they’re not over-exposing themselves to the whims of the company or the country’s thirst for mortgages," Joy said. 

"This is still decidedly Dan Gilbert’s company with investors able to go along for the ride, but control of the company is concentrated with Gilbert and a small group of investors."

Gilbert has 79% voting power in what's a multitiered stock structure. Gilbert also owns the Cleveland Cavaliers NBA team. 

Risks associated with Rocket include the possibility of a deeper than expected recession, and continued high unemployment that could drive down home sales and drive up consumer defaults. 

Rocket executives downplayed the risk of a higher interest rate environment, which might cool the red hot mortgage business. Farner told CNBC that the company doesn't "think about the rates." Instead, he said, client service and technology drive the business. 

IPOs are far from sure bets in general. 

"We are not huge fans of IPOs because of the psychological aspects of investing," said Sam Huszczo, a chartered financial analyst in Southfield, Michigan. "Storytelling is one of the most powerful ways to sell any product and IPOs almost always come pre-loaded with a phenomenal story behind them, which can help inflate prices,"

One study, he said, suggested that the average IPO has underperformed its relative market benchmark by 21% per year in the first three years after its release. 

Huszczo maintains that an IPO stock can, over time, lag by comparison because the stock price of the IPO gets inflated amid all the excitement of the initial offering. 

"Pandemics and IPOs were not something that we had expected to see together, but who would have predicted that many Americans would have used their stimulus checks to invest in the stock market?" he said.

ContactSusan Tompor via stompor@freepress.com. Follow her on Twitter@tompor. If you'd like to subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.