New York Stock Exchange operator Intercontinental Exchange (ICE 0.18%) knows a few things about investing. The company has booked monster profits from two crypto investments and is now investing in another area of its business. This time, the company could change the game in the giant mortgage industry. Here's what happened.
What's next after crypto?
In December 2014, before anyone had ever heard of Bitcoin, Intercontinental Exchange invested $10 million for 1.4% ownership of a little-known crypto exchange called Coinbase Global (COIN 2.01%). The exchange was firmly entrenched in the crypto frenzy years later. Though it was almost unnoticeable at the time of its investment, it eventually sold its stake when Coinbase IPO'd in April 2021 for a mind-numbing sum of $1.24 billion.
Intercontinental Exchange's Coinbase investment foreshadowed another crypto-related investment. Bakkt (BKKT 4.97%) was initially launched in 2018 with majority backing from Intercontinental Exchange. The company was formed to provide digital wallets to institutional and consumer users to buy, sell, and spend digital assets. Of course, digital assets include crypto but also extend to airline miles, hotel loyalty points, and credit card points.
In late 2021, Bakkt merged with VPC Impact Acquisition, a special purpose acquisition company (SPAC) sponsored by Victory Park Capital, and the shares went public in October. In its annual report a few months later, Intercontinental Exchange booked an astonishing $1.4 billion gain from the transaction. Unlike its Coinbase investment, though, the exchange still holds its stake in Bakkt because it sees a future in digital currency, even if it doesn't include cryptocurrency.
Image source: Getty Images.
More recently, however, the SPAC has made a more significant investment in the mortgage tech company Black Knight (BKI). In May, Intercontinental Exchange announced it had agreed to acquire Black Knight for $85 per share, implying a market value of $13.1 billion. Prior to the acquisition, the exchange had a competing mortgage tech business.
Intercontinental Exchange's mortgage tech business provides software for loan officers, mortgage origination, closing, funding, and compliance. Black Knight's mortgage tech business overlaps in origination and expands the combined company's capabilities to multiple listing service (MLS) solutions and loan servicing. In addition, Black Knight is a leading data analytics provider in the real estate market.
Before the agreed tie-up, Black Knight made a significant mortgage tech investment of its own. In February 2022, the company completed a deal to acquire the remaining shares of Optimal Blue that it did not already own. Optimal Blue's mortgage tech business provides a software suite that aids its customers in carrying out secondary transactions in the mortgage market. Ironically, Black Knight funded part of the deal with 37 million shares of Dun & Bradstreet Holdings it owned from a previous investment.
Altogether, the complementary capabilities of the mortgage tech companies provide one of the first end-to-end software packages on the market. On top of that, the combined company will have a mountain of real estate and mortgage data it can use to bolster its data and analytics business.
Intercontinental Exchange points out that the average origination costs have ballooned from about $4,000 in 2009 to $9,000 in 2021. The company believes the new mortgage tech segment can shave off $2,600 -- nearly 30% -- of those costs. Savings at that level make hiring Intercontinental Exchange a very compelling proposition, especially considering the massive number of originations some banks and mortgage companies do.
Is Intercontinental Exchange a buy right now?
The Intercontinental Exchange/Black Knight mortgage tech portfolio is a compelling reason to get excited about the stock. The mortgage portfolio adds to the exchange's existing exchange segment consisting of 13 regulated stock and commodity exchanges, including the New York Stock Exchange and six clearing houses.
The Black Knight deal is not expected to close until the first half of 2023, but Intercontinental Exchange expects the accretive to its earnings per share in the first year after the deal closes. In addition, the deal should cut expenses by $200 million and provide $125 million in revenue synergies.
The company's stock is down about 19% this year because rising mortgage rates could potentially slow down the real estate market and crimp fees earned from mortgage originations.
If you're worried about the same things, consider that Intercontinental Exchange projects recurring revenue in its mortgage tech segment will increase from 50% of its revenue mix to 70% after the Black Knight acquisition. The stock's fall could represent an outstanding opportunity for long-term investors.
