Initial Public Offerings typically benefit the owners and insiders. Investors who buy the stock after IPO are paying the fully valued price at the beginning. Unless market euphoria builds post-IPO and demand sharply exceeds supply, stocks like Rocket Companies (RKT) will underperform. It is easy to dismiss Rocket stock as “Rekt” (recked) based on its ticker. Conversely, strong metrics signaling accelerating growth ahead may also send RKT stock rocketing higher.
Rocket categorizes itself as a financial technology company. It offers personal finance and consumer service products that include Rocket Mortgage. The firm is open 24/7.
Traders who specialized in trading IPO stocks like Uber (UBER), Spotify (SPOT), or Lyft (LYFT) would have done well by holding. Is Rocket stock in the same category?
Strong Quarterly Results
Rocket posted loan originations increasing 40% sequentially, giving the stock an 8.9% premarket bump but not enough to the $24 opening day price. To recap, the company posted a sequential sale margin of 5.19% compared to 3.25% in Q1. EBITDA of $3.8B is more than triple Q/Q and up nearly nine-fold Y/Y.
The Q2 net revenue of $5 billion, net rate lock volume of $92 billion, and sharp net income growing to $3.5 billion, up from $97 million in Q1 suggest Rocket has more momentum ahead. By embracing digitization, the company may get ahead of the bricks and mortar institutions. This Seeking Alpha user summarized it best:
Digitization is not going away, no matter what happens with regulations or the economy, RKT will be a leader in lending as they have a huge head start. They haven’t been just skating to the puck – they’ve been building the next arena. Except that the next arena does not need to be physical.”
Rocket’s long-term investments are paying off. Last year, the then 34-year-old mortgage lender hired 1,300 staff. And when the Fed cut interest rates to zero, home loans will only trend even higher. CEO Jay Farner said:
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.”
Trading at below $20 a share and at a $38.1 billion market cap at the time of writing, Rocket stock may trade in a range for now. In the coming months, the insider lockup expiry might add selling pressure. Unless insiders hold on to all their shares, cautious investors may not want to hold a full position in Rekt stock.
Few investors should be surprised that the majority of analysts rate Rocket stock as a “strong buy.” Investment houses do not benefit issuing a “sell” rating because they will lose out on trading fees if investors avoid the stock. The “hold” rates could become “buy” ratings later if Rocket posts strong results for the next few quarters.
Stock Rover also issued six warnings. The stock has a quality score of 20/100, based on ROIC, net margin, and more. The value score is 35/100 (for example, based on EV/EBITDA, P/E, and P/S). Euphoric valuations for a technology firm is nothing new. On the DIY Value Investing Marketplace, Datadog (DDOG) and MongoDB (MDB) were “on sale” last summer at unfavorable P/E multiples. Those picks went on to reward investors as the work from home trend accelerated.
Accelerating demand for Rocket through its app might lift its addressable market share win. In that scenario, the valuations should not scare off investors.
Among the SA community, the average SA author rating is “neutral.”
Source: SA Premium
Investors should compare Rocket to other stocks that IPO’d in the last 1-3 years. This might give an idea of Rocket’s volatility in the months ahead.
Below, investors still profited from the LYFT and UBER IPO if they bought at the right time.
To compare Rocket objectively, look at the failure of Dropbox (DBX) to trade above its IPO price in the last few years, too:
Above, readers must look for post-IPO duds to build a worst-case trading scenario for Rocket stock.
Rocket is a compelling trading stock in the near term for investors who rely on high volatility levels. If markets happen to correct badly and investors lose confidence in the Fed, this stock will probably fare poorly. Markets do not have a valuation history to rely on. Due to that uncertainty, the stock would underperform. On a brighter note, if markets continue to break out to new highs, just as the Nasdaq (QQQ) or the S&P 500 did or is about to, Rocket shares will not re-test recent lows.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.