Rocket Companies (NYSE:RKT) Tries To Lift Off After Earnings Update

A Head-Spinning Two Weeks For Rocket Companies

Rocket Companies (NYSE:RKT) IPO’d less than two weeks ago and in the time since has had the market’s head spinning. The IPO itself came with a lot of expectations, expectations that weren’t met by the disappointing showing on opening day. The forecast for that first offering was 150,000 shares at $20-$22. What we got was 100,000 at a mere $18 and a week of volatile trading. Shares popped that first day, jumping to over $26 the 2nd day, but the move didn’t last. Now, despite an eye-popping update on 2nd quarter results, shares of Rocket Companies are back down near the $18 level begging the question, is this stock worth a nibble or not?

Before I move on, I want to touch base for a moment on what, exactly, Rocket Companies is. Touted as a fintech, Rocket Companies is the all-eCommerce face of Quicken Loans. Quicken Loans has long been a leader in the mortgage origination business and now focusing on eCommerce channels. It is possible Rocket Companies will disrupt the mortgage industry with its all-digital process but, since all mortgage companies have at least some e-presence, major disruption is not really expected.

Rocket Companies Blows Past 2nd Quarter Targets

The Rocket Companies made a big splash last week when it provided a preliminary look at the 2nd quarter results. By all metrics, the company is surpassing its targets by substantial margins. The caveat is that, at least for now, there is but one lone analyst covering this stock and he is only neutral. Jack Micenko of Susquehanna Financial says the firm faces a significant headwind in that the total origination market is expected to shrink. The surge in demand reported for the 2nd quarter is heavily dependent on volumes driven by the pandemic and, in his view, that trend is not sustainable. Regardless, as I’ve stated before, when it comes to an IPO a neutral rating is as good as a buy.

In terms of business volume, Rocket Companies closed-loan-origination volume totaled $72.3 billion dollars. That’s up 40% on a sequential quarterly basis and more than 125% higher than the same quarter last year. Margins rose more than expected as well, primarily due to mix, and came in at 5.19% versus 3.25% in the 1st quarter and 3.22% in the 2nd. On an adjusted basis, the top line revenue came in at $5.31 billion, that’s up 300% from the previous year. On the bottom line, adjusted EBITDA rose 317% from the previous quarter and 870% from the previous year.

Even if business slows in the coming year it is not expected to fall to pre-COVID levels. The shift to digital is real and one that Rocket Companies can capitalize on. The question is how much business growth will decelerate in the coming year. Considering the amount of demand for homes the odds are good it won’t be much. The trick for Rocket Companies will be to build on 2Q gains in terms of brand recognition and market share.

"The long-term investments we have made in our people and our flexible, scalable technology platform have allowed us to increase our capacity, take advantage of favorable market conditions, and in turn position us to capture additional market share,” says Jay Farner, chief executive officer of Rocket  Companies.

The Technical Outlook: Price Discovery Is Still In Process

If there is one thing clear about this chart it is that price discovery is still in process. The stock has only been trading for 8 now 9 days and just doesn’t have enough history to make a trading plan. Price action could just as easily shed 10% or 20% or 50% as gain it. With that said, it appears as if support is still firm at or above the IPO price of $18. So long as that price level can hold I would expect to see the market to at least move sideways over the next quarter if not begin rising. The company is expected to release final results for the 2nd quarter on September 2nd and give an outlook for the future. If the call goes off well I think this stock could begin moving higher very soon. Until then it’s nothing more than a speculative buy.