We came across a bullish thesis on Rocket Companies, Inc. (RKT) on Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on RKT. Rocket Companies, Inc. (RKT)’s share was trading at $14.18 as of Dec 2nd. RKT’s trailing and forward P/E were 213.22 and 25 respectively according to Yahoo Finance.
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Rocket Companies (RKT), formerly known as Quicken Loans, stands out as a mortgage-oriented FinTech company well-positioned to capitalize on a potential home equity loan boom. With U.S. homeowners holding an impressive $32 trillion in home equity, a shift in mortgage rates toward 5% to 5.5%—a scenario potentially catalyzed by favorable policies—could trigger significant activity in the mortgage and home equity markets. While the housing market remains cool due to high mortgage rates averaging 3.9% for existing loans, home equity loans are emerging as a more attractive option than cash-out refinancing, setting the stage for RKT to benefit substantially.
Rocket’s journey has not been without challenges. The company has endured a steep revenue decline from its 2022 peak of $18 billion to $4 billion over the trailing twelve months, reflecting the broader industry slowdown. Despite this, Rocket’s financial resilience is notable. Its mortgage servicing portfolio, comprising 2.7 million loans, has proven a robust revenue source, covering fixed costs even in this downturn. Additionally, Rocket has maintained mostly positive EBITDA, aided by disciplined cost control and strategic investments. However, scrutiny over “adjusted” EBITDA figures has grown, especially following the SEC’s mandate for greater transparency. The company’s most recent quarter revealed a sharp contrast between a $286 million adjusted EBITDA and a $481 million GAAP net loss, underscoring the need for investors to navigate complex financial reporting.
Leadership changes have added another layer of uncertainty. Following the retirement of long-serving CEO Jay Farner, Rocket has cycled through two CEOs, ultimately appointing Varun Krishna, whose diverse background includes roles at Intuit, PayPal, and Microsoft. While Krishna brings valuable tech expertise, the absence of insider stock purchases by senior leadership raises questions about confidence in the company’s near-term trajectory. Insider buying is limited to Director Matt Rizik, whose ties to founder and majority shareholder Dan Gilbert could signal some optimism but may not carry significant weight for external investors.
Rocket’s tech-forward approach is a cornerstone of its strategy. The company reinvests heavily in FinTech development, aiming to reduce customer acquisition costs by driving mortgage originations through its app rather than brokers. This approach eliminates substantial commission expenses, enhancing long-term profitability. However, the effectiveness of this investment remains uncertain, and its unconventional corporate structure—with a tiny public float and substantial insider ownership—introduces high volatility and limits shareholder influence.
Looking ahead, Rocket’s ability to capture market share as conditions evolve will be critical. It currently holds 12% of the refinance market and aims to grow this to 20% by 2027. While the potential for growth is significant, near-term upside is likely capped due to the company’s size and operational headwinds. If the housing market rethaws with falling interest rates, Rocket is well-positioned for a rebound, potentially driving its share price to $20. However, its ultimate success hinges on its ability to grow market share in a more competitive, less frenzied market. For now, Rocket offers a compelling short-term opportunity with long-term potential but warrants caution for investors seeking enduring stability.
Rocket Companies, Inc. (RKT) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 27 hedge fund portfolios held RKT at the end of the third quarter which was 21 in the previous quarter. While we acknowledge the risk and potential of RKT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RKT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.