They say timing is everything. Detroit-based mortgage solutions provider Rocket Companies (NYSE:RKT) seems to have taken this mantra to heart. Whether by design or chance, the company's August 6th initial public offering (IPO) appears to have come at a great time.
Homebuyers have been stampeding to obtain mortgages amid a strong summer housing recovery. According to the Mortgage Bankers Association, last week's mortgage application volume was 28% above where it was last year. Some of this relates to pent-up demand from the spring when lockdown restrictions were in place, but ultra-low mortgage rates are clearly as factor as well.
The U.S. 30-year mortgage rate notched its ninth record low this week slipping to 2.86%. Record low mortgage rates are likely to continue to spur demand for mortgages nationwide. And this means plenty more business could be heading Rocket's way.
Despite this tailwind, the stock's limited trading history has been reason for some investors to stay off the launch pad. With the stock now trading back down near its IPO price, is a good time to get in?
Will Rocket Benefit from Housing Market Conditions?
Rocket was the first to offer a fully digital mortgage lending experience and has closed over $1 trillion in loans since its 1985 inception. In recent years, several competitors have emerged to try to take away share from the digital mortgage leader. This represents an ongoing threat to Rocket's growth prospects.
In the near-term, the bigger question is whether the housing market rally can continue to provide a boost for Rocket. Freddie Mac Chief Economist Sam Khater recently said the housing strength "will be difficult to sustain" citing the limited supply of homes on the market.
So, what can drive an increase housing supply to keep the rally going? Ultimately homeowners will have to decide that the timing is right to sell their homes. Downsizing, upsizing, or lateral residential moves will need to trend higher. Given that we are in a seller's real estate market with prices firming in many U.S. markets, homeowners may start to sell if prices continue to move higher.
A shakeup of the supply-demand dynamic would certainly propel Rocket higher. When one family decides to find a new home, this creates two potential mortgage opportunities for Rocket and its mortgage peers.
In the meantime, many are turning to new construction as a solution to the limited housing supply. It is a trend that has been born out of the pandemic as more people have considered a suburban new build as a fresh alternative to densely populated urban living.
Can Rocket Companies Get a Second Wind?
Rocket came out of the gates firing. In less than a month, the stock soared from its IPO open of $18 to a September 2nd peak of $34.42.
In recent days, Rocket has come back down to earth following its second quarter report. Despite posting strong Q2 growth, the market focused on the company's Q3 loan volume outlook for 105% to 112% growth. This would mark a slowdown from Q2's 126% year-over-year growth but is likely not a sign of Armageddon.
Management may be taking a cautious stance given the highly uncertain economic backdrop— and it wouldn't be surprising to see this forecast surpassed. But even if it doesn't, this is still very strong growth. And the longer-term growth trajectory is more important than Rocket's quarter to quarter fluctuations.
Now trading around $23 per share, Rocket trades at just 7.3x forward earnings. Although many stocks appear to have gotten too cheap during the recent market downturn, Rocket looks to be one of the better bargains out there.
Analysts' opinions of Rocket's stock are mixed with three buys, eight holds, and one sell. The Street's price targets range from $20 to $35 and the average is just over $28. This represents around 20% upside over the long-term, which may not be enough to get some growth investors excited.
What are Rocket's Long-Term Growth Drivers?
But longer-term there may be some significant upside here. Looking past the unusual economic environment to what will hopefully be more normalized conditions three to five years from now, Rocket's growth opportunity looks solid.
Aside from the underlying growth catalyst provided by U.S. home price appreciation (which has historically been about 3%), the Rocket brand has significant value.
In an increasingly digital world, Rocket's digital-first brand should resonate with the next generation of homebuyers. Convenience-focused Millennials and Generation Zers are likely to gravitate toward Rocket's fast and easy to use platform rather than leafing through pages of paper documentation.
Future growth will also be driven by Rocket's rapidly expanding partner network. This has the potential to generate meaningful growth outside of the company's core direct-to-consumer channel.
Rocket also has businesses in auto and personal lending via Rocket Auto and Rocket Loans in addition to a small media business that help generate client leads. These non-core segments diversify the business model and represent complementary revenue sources that can offset weaker periods in the housing market cycle.
Overall, the 30% pullback appears to be a good opportunity for long-term investors to hop on board Rocket. The market's reaction to the second-quarter report was overdone and nearsighted. Rocket is the leader in its space and is in a good position to benefit from housing market growth and the rise of the digital consumer. Investors should expect a second ignition in the months ahead.
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