1.275 billion dollars, all cash. When news hit two weeks ago that the lending company owned by Cleveland Cavaliers owner Dan Gilbert was buying the personal finance app Truebill, heads turned.
It was an eye-popping sum for a company that just 6 months earlier raised a series D at a $500M valuation. Did Truebill deserve the valuation? What did Rocket see in them?
The surface-level analysis was that the two businesses have nothing to do with each other. Rocket is a lender. Truebill is an app to analyze your bills.
But, there is much more to the story. Rocket Companies has gone public twice. The man behind it, Dan Gilbert, is a hero to two midwestern cities: Cleveland and Detroit. Truebill was founded by three brothers in a basement in Maryland.
And the companies have the potential to help each other. Rocket has a low valuation multiple. Truebill could be just what it needs to compete in the coming fintech SuperApp wars.
Researching these companies was amongst the most fun I have had. Plus, Truebill is just a great app you want to learn more about. So, join me as we explore:
- Rocket’s Business
- The Truebill App
- The Purchase Price
- Possible Synergies
Rocket’s Business
Rocket Companies has one of the most convoluted and fascinating ownership stories. Rocket Companies’ main business is Rocket Mortgage. Rocket Mortgage has changed names and hands several times.
Chapter 1 – Rock Financial
In 1985, Dan Gilbert founded Rock Financial. It was a traditional mortgage provider, and the business grew quickly. Thirteen years after founding, the company went public, in 1998.
In the years surrounding the IPO, the company made the early transition from a traditional mortgage provider to an internet-focused lender. This would prove to be very astute. Intuit saw the company’s savvy moves, and a mere year and a half after IPO, purchased Rock Financial.
Chapter 2 – Quicken
Makers of the popular Quicken personal finance software, Intuit saw a chance to rebrand the business Quicken Loans. However, other than the rebrand, the business squandered under its new owners.
Two and a half years after selling the company, Dan Gilbert led a group of private investors to purchase back the Quicken Loans subsidiary. Under Dan’s leadership, the company saw renewed growth.
By 2007, the company was such a significant player in the mortgage market that the city of Detroit was negotiating with it to bring its litany of suburban offices downtown. The company was flush with cash and entered the reverse mortgage market with an acquisition.
Then, the 2008 financial crisis hit. Like most other people involved with the housing market, Quicken Loans had a turbulent period. Headcount reductions and defaults were the stories of the day.
But, the company survived. And those that managed to survive, tended to thrive. Since then, America’s housing market has seen an uninterrupted continuous 13-year bull run, and Rocket Mortgage has been a primary beneficiary.
Chapter 3 – Rise to the Top
In 2014, Quicken Loans became the second-largest mortgage lender in the United States. The company employed 24,000 people, including 17,000 in Detroit, making it the city’s largest employer. Since then, it has been the prominent company leading the city’s downtown revitalization.
For six years, the company continued its ascent. In July 2020, Quicken Loans surpassed Wells Fargo to become the nation’s largest mortgage lender. The company is now funding over 2 trillion dollars in loans a year. That is an insanely large business in one of the world’s largest and most important mortgage markets.
As a result, it is the core business of Rocket Companies today. The company has a few other things going for it. It owns Dictionary.com, for instance, but the core is Quicken Loans. On the back of that strong business, the company IPO’d, for a second time, and rebranded Quicken Loans to Rocket Mortgage.
Chapter 4 – Low Valuation Post IPO
It has had a fairly volatile stock price that has left even seasoned market analysts scratching their heads why it trades at such a low price to sales and earnings to sales ratios. It is one of the most shorted companies in the market. In March, 2021, the stock soared 70% as part of the WallStreetBets short squeeze.
Since then, the stock has come back to earth. Its current $30B market cap values the company at 0.15x trailing twelve-month sales and 5x trailing twelve months earnings.
For comparison, consumer lending company Upstart is valued at 15x sales and 146x earnings. Whereas Upstart is valued as a tech company, Rocket is valued as a declining mortgage lender.
This pitiful multiple was surely a driver in the purchase of Truebill. Let’s turn their next.
The Truebill App
Chapter 1 – A Bold Beginning
Truebill is one of the greatest 0 to 1 stories in Fintech in the last decade. Started by three brothers after a brainstorm in their basement in Maryland, the Mokhtarzada’s went through Y Combinator in 2016 and sold for over a billion dollars 5 years later.
I was building a personal finance app in 2016! So I acutely remember what the world looked like then. Mint had been around for 10 years, Credit Karma for 9, and Personal Capital for 7. Crunchbase had over $13B in VC funding already allocated to the personal finance category.
From Acorns to Prism, the personal finance space looked thoroughly covered. I made the poor decision to focus on loyalty rewards. The Mokhtarzada’s instead went for the big category. Intuit had let Mint wither on the vine since its acquisition in 2009. The three brothers would build something better architected for the specific use cases users originally would have gone to Mint for.
That use case started with a “single function.” Like all great products, Truebill started with insane focus. What was that? To help users track all their subscriptions and recurring expenses, so they can cancel them if or when desired.
You see, the Mokhtarzada’s had just previously built and sold a subscription business. What they found running it is that many users renew just because they did not get around to canceling. So they had an acute awareness of the problem. That belief in the problem has driven them to succeed.
To this day, subscription tracking is the app’s big acquisition engine, the hook that brings people in. It powered Truebill to soar in the app download charts for years. The team made it dead simple to monitor bills with features like tracking and alerts. They also made canceling subscriptions one tap in the app. It was magical. Two taps and they’d renegotiate for you.
Also critically, the team differentiated from Mint. Doing user discovery, the team found two things.
- Mint sold users’ data.
- Users didn’t trust Mint’s categorizations.
In response, Truebill decided to never sell data. Unlike Mint.com, users felt like they could trust Truebill with their finances. In addition, the team doubled down on the categorization algorithm. As one of the Mokhtarzada’s said:
What makes us different [from Mint] is that we make sure the data is categorized correctly.
Chapter 2 – Land And Expand
After the team found initial product-market fit and a loyal user base, they expanded upon it to new use cases. Users already had to connect their checking account to find and eliminate unwanted subscriptions. What else could the team do to help users with that data?
The product team began the user discovery process. They quickly discovered that everyone was facing increasing degrees of financial complexity in their lives. With the advent of the internet, new financing options, and growing awareness of personal finance indicators like credit score, consumers were more bewildered than ever.
The team saw an opportunity to offer its customers a more holistic view of personal finance. By 2019, Truebill had added automated budgeting, automated saving, and bill negotiation. If there was a cable blackout in the area, Truebill would help negotiate a rebate with your cable provider. These features did not necessarily drive high levels of acquisition, but they were great re-engagement and retention levers. In particular, smart savings had a very high adoption rate. The app reached 500,000 active users.
The team further dug into what users were doing with smart savings. What they found is that there was a big difference between users hitting and not hitting their goals. For those not hitting their goals, there was a lot Truebill could do to help.
Chapter 3 – Personal Finance SuperApp
By 2020, it was building a SuperApp for finances, including net worth tracking, emergency funds saving, and credit report optimization. It was even offering bonuses for people who hit their goals. These techniques worked. Despite competition from the likes of Google Pay, the app reached 1 million active users.
What’s more, many of the additional features have been monetized. While bill tracking, the core acquisition engine is free, Truebill has perfected the B2B SaaS freemium model in the consumer space. Once consumers try to use a feature like bill negotiation, Truebill hooks them on a monthly subscription. These start as low as $3.99 per month, but they quickly add up to serious recurring revenue for Truebill.
Nowadays, the budget app game is crowded, with apps like Trim generating increasing news. Truebill has differentiated itself with its ambitious approach. Few apps do so much, at such a low subscription price.
And, oh boy, does the market put a hefty enterprise value multiple on that recurring revenue. Comparable companies like Duolingo have a price-to-sales ratio in the 20-30x range. This brings us to the valuation, did Rocket companies pay a fair price for Truebill?
The Purchase Price
Truebill generates $100M in annual recurring revenue. Duolingo is at about double that, $200M. At a $4 billion market cap, Duolingo trades at 20x ARR. Doing that math for Truebill gives them a valuation of $2 billion.
That makes the $1.275 billion purchase price look pretty good. Of course, Duolingo is growing 50% year over year. We do not know Truebill’s growth rate. Given the valuation difference, however, we can expect it to be lower. Duolingo has also achieved a cultural significance that Truebill has not.
By Google Trends, Duolingo has a 92 interest and Truebill has a 24 interest. That makes Duolingo significantly more culturally relevant than Truebill.
Even haircutting the Duolingo comparison by, say, 40%, we get to about $1.2 billion. That is pretty close to the Truebill price. So, the price that Rocket paid looks to be very reasonable.
We could do this process for other comps, but the high level is that Rocket got the market rate for the company. It does not look like they massively overpaid.
Possible Synergies
Returning to the original Rocket and Upstart comparison, the explanation of the valuation difference, of course, is growth. Upstart is growing faster. It has a forward price/earnings to growth ratio of 1.06 and Rocket 0.64.
So, what Rocket is really after is two things: sustainable growth and higher multiple recurring revenue. This will help it increase its low valuation multiple today. The Truebill acquisition helps in that context.
At the same time, the lesson Rocket Companies itself is to be cautious of small entities within a much larger organization. Intuit bought Rocket Financial for $565M. Two and a half years later, Dan Gilbert bought it back at one-tenth of the price. That is a huge risk for Truebill, as well.
It is not immediately clear what the core businesses of the two companies have to do with each other. Sure, they bought operate in the realm of personal finance. But one helps you buy a house every 10 years or so. The other is analyzing your spending and helping you save.
The strategic lens that provides a potential justification for this seeming orthogonality is that all finance apps appear to be converging towards SuperApps. In fact, arguably the story of 2021 was the rise of Fintech SuperApps. Across the world, the companies rose in number and valuation.
In this context, the most important thing to watch for as Rocket integrates Truebill is: do they bring the apps together? If they create one app and pursue the SuperApp strategy, perhaps Rocket can transform itself from a digital lender to a fintech, and get the multiple rerating it so wants.
At a small fraction of its market cap, Rocket was able to take an asymmetric bet. We’ll have to wait to see if it pays off.
