Is RKT Stock A Buy?

Is RKT Stock A Buy? Rocket Companies (RKT) runs various branded digital services related to finance, insurance and lending. These include Rocket Mortgage, Rocket Homes and Rocket Auto, as well as other subsidiary services like Lendesk and Edison Financial.

In general, Rocket Companies focuses on modern digital services, where the company helps consumers to complete transactions or utilize personal finance assistance through online or cloud platforms. The appeal of handling lending or personal finance data directly through the web has been the main value that RKT brought to market.

Although RKT operates various services, it is perhaps best known for its Rocket Mortgage platform that helps homebuyers to evaluate and access financing.

RKT Revenues and Earnings Forecasts

On the revenue side, Rocket Companies most recently reported revenue of $4.5 billion for the quarter in May, beating analyst expectations around $4.41 billion.

That brought the annual revenue for a year ending that quarter to around $18.9 billion, which analysts reported as a 382% increase year over year. By contrast, RKT reported a total of $15.7 in revenue for 2020.

In 2019, though, total revenue was $5.1 billion, or about one third of that figure, having ticked up from $4.1 billion in 2018. Something obviously went right for RKT, despite the downward pressure of the pandemic.

The revenue estimates predict RKT to return to $2.8 billion in quarter two, and $2.4 billion in quarter three. Revenue is projected to reach its nadir with $2.1 billion in quarter four, and then bounce up slightly to $2.2 billion in the first quarter of 2022.

For the first quarter of 2021 reported May 5, EPS was $1.07. Analysts’ estimates suggest that RKT EPS may be $0.52 per share in the second quarter of this year, $0.39 per share in the third quarter, and $0.32 per share in the fourth quarter. The consensus estimate for the first quarter of 2022 is $0.34 per share.

Rocket Mortgage Aims To 3x Its Market Share

Rocket has the lion’s share of the US mortgage market, holding about an 8% market share but it’s not resting on its laurels.

Within the decade, Rocket forecasts that it will capture 3x more market share to stand at around 25% of the overall US mortgage market.

If you’ve been through a mortgage application with Rocket recently, you would see that its investments in technology have paid off big time. The process is very smooth online. The user experience is clear and the user interface is intuitive. That’s what $500 million of investment in technology produces.

Almost twice that amount has been spent on marketing, which is probably why the Rocket Mortgage brand is so well known to most borrowers. The rates are highly competitive too. 

Where Rocket falls short is the nuts and bolts of the mortgage process. Lots of pitfalls exist when borrowers are handed off from sales to processing and so forth. Borrowers complain that Rocket often leaves things to the last minute, which creates risk of forfeiting down payments, as the threat of missed deadlines increases.

But these are flies in the ointment overall. For borrowers the low rates compensate for the headaches of the borrowing experience.

Rocket Is Fully Valued At This Time

Rocket is valued at around $20 per share based on a discounted cash flow forecast, suggesting that the share price is fully valued at current levels.

Analysts’ consensus estimates factor in future revenue growth projections alongside estimated costs and discounted projections back to the present day using a net present value calculation usually.

It’s not clear what risk premium is applied in all the models but when you sum it up the overall RKT stock prediction is for an RKT price per share of $20.36.

Is RKT Stock A Buy? The Bottom Line

Rocket Mortgage is tethered strongly to the US housing market. As such, it is really a bet on whether housing will stay strong for some time. That in turn is likely a function of inflation.

Present market conditions suggest that inflation will increase and persist. Top hedge fund manager, Paul Tudor Jones, recently stated that he does not believe inflation will be transitory as the Federal Reserve and others are modeling in at this time.

If he’s correct, the nominal price of houses is likely to go up because the nuts and bolts of a home, such as lumber, has increased in price. Indeed commodities in general have risen in price very substantially over the past year and that leads to high expectations that housing prices will not slow down anytime soon.

Any buyer in Florida or Texas can tell you just how sky high prices have already gone and it’s very possible those trends will continue for another few years before the brakes are applied.

All that bodes well for Rocket Mortgage because as prices rise, demand tends to rise too. Those who missed out on rising prices like to jump on board the trend and participate so they don’t miss further gains. And the winner in the mortgage game is Rocket with its low rates.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.