This company earned $2.6 billion from crypto. What is being invested in now?
New York Stock Exchange operator Intercontinental exchange (ICE 0.82%) know a few things about investing. The company has booked monster profits from two crypto investments and is now investing in another area of the 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 -2.31%). The exchange was firmly rooted in the crypto frenzy years later. Although it was almost imperceptible at the time of the investment, it eventually sold its stake when Coinbase went public in April 2021 for an unimaginable sum of $1.24 billion.
Intercontinental Exchange’s Coinbase investment heralded another crypto-related investment. Baked (BKKT -4.24%) was originally launched in 2018 with majority backing from Intercontinental Exchange. The company was formed to provide digital wallets to institutional and consumers to buy, sell and use digital assets. Digital assets include crypto, of course, 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 its shares went public in October. In its annual report a few months later, the Intercontinental Exchange posted an astonishing $1.4 billion profit from the transaction. Unlike the Coinbase investment, the exchange has maintained its stake in Bakkt because it sees a future in digital currency, even if it does not include cryptocurrency.
Image source: Getty Images.
Recently, however, the SPAC has made a more significant investment in the mortgage technology company Black Knight (BKI 0.13%). In May, the Intercontinental Exchange announced that it had agreed to buy Black Knight for $85 per share, implying a market value of $13.1 billion. Prior to the acquisition, the exchange had a competing mortgage technology business.
Intercontinental Exchange’s mortgage technology business provides loan officer software for mortgage origination, closing, financing and compliance. Black Knight’s mortgage technology business overlaps in origin and expands the combined company’s capabilities into multiple listing services (MLS) and loan servicing solutions. In addition, Black Knight is a leading provider of data analysis in the real estate market.
Prior to the agreed tie-up, Black Knight made a significant own investment in mortgage technology. In February 2022, the company completed an agreement to purchase the remaining shares of Optimal Blue that it did not already own. Optimal Blue’s mortgage technology business offers a software suite that helps clients execute secondary transactions in the mortgage market. Ironically, Black Knight funded part of the deal with 37 million shares Dun & Bradstreet Holdings it owned from a previous investment.
Together, the complementary capabilities of the mortgage technology companies provide one of the first end-to-end software packages on the market. In addition, the combined company will have a mountain of real estate and mortgage data it can use to strengthen its data and analytics business.
Intercontinental Exchange points out that average origination costs have increased from about $4,000 in 2009 to $9,000 in 2021. The company believes the new mortgage technology segment could shave $2,600 — nearly 30% — off those costs. Savings at that level make hiring Intercontinental Exchange a very compelling proposition, especially considering the huge number of originations some banks and credit unions do.
Is Intercontinental Exchange a buy right now?
The Intercontinental Exchange/Black Knight mortgage technology 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 its earnings per share to increase in the first year after the deal closes. In addition, the agreement would cut expenses by $200 million and provide $125 million in revenue synergies.
The company’s shares are down around 19% this year because rising mortgage interest rates could potentially slow the real estate market and shrink fees earned from mortgages.
If you are concerned about the same things, consider that recurring revenue from Intercontinental Exchange projects in the mortgage technology segment will increase from 50% of the revenue mix to 70% after the Black Knight acquisition. The stock’s fall could represent an unprecedented opportunity for long-term investors.
BJ Cook has no position in any of the aforementioned shares. The Motley Fool has positions in and recommends Coinbase Global, Inc. The Motley Fool recommends Intercontinental Exchange. The Motley Fool has a disclosure policy.
