Rocket Companies: Even Rockets Run Out of Gas Eventually

Rarely has a stock lived up to its name in such fantastic fashion.

On Tuesday, shares of personal and mortgage finance company Rocket Companies (RKT) shot very close to the moon, up 71% in a single day of frenzied trading on no actual news of note. Granted, Rocket did report earnings fairly recently, announcing revenue growth of 144% in its fiscal fourth quarter, nearly tripling its net income, and predicting that in Q1 2021, it will close “loan volume of between $98 billion and $103 billion, or an increase of 90% to 99%.”

But again, that was the news last week. So far this week, literally nothing of substance has happened that would explain why Rocket Companies stock should be flying so high.

Presented with this conundrum, RBC Capital analyst Daniel Perlin reluctantly concluded that it is time to downgrade Rocket stock to Sector Perform (i.e. Hold) with an unchanged $30 price target. (To watch Perlin’s track record, click here)

The 5-star analyst argued that Rocket’s Q4 numbers last week were “strong,” validating his “Street-high” price target on the stock, but he called Tuesday’s volatility “abnormal” and warned investors that at its closing share price of $41.60, the risk in Rocket stock is now “skewed to the downside.”

Now, if you’re an investor in Rocket, the fact that the company’s biggest fan on Wall Street has just shambled off to join the bear camp, predicting a 28% decline in the company’s share price, that’s probably a bit disconcerting — but don’t lose heart entirely.

In Perlin’s view, all the factors he previously highlighted as favoring Rocket’s business remain in effect. “The mortgage market remains elevated,” advises the analyst, “originating volumes were very strong in Q4,” and this loan volume will probably close to double in Q1 2021. That will continue to benefit Rocket with “positive operating leverage,” and while this trend is close to peaking, Perlin believes it will last “throughout FY21” at least, and possibly continue for a time into 2022 as well.

Nevertheless, after Rocket’s remarkable rise Tuesday, the analyst seems to think that now is a good time to declare victory and go home.

At first glance, it may seem an overreaction. After all, based on the $4.10 in “adjusted diluted” earnings Rocket reported for fiscal 2020, even Tuesday’s astonishing leap in stock price leaves Rocket stock trading close to 10x that adjusted figure. But to put a point on the analyst’s pessimism about future stock price gains, consider:

Perlin guesstimates that revenues that topped $16.4 billion in 2020 will decline by about 21% in 2021 ($13.4 billion) before falling a further 28% ($9.7 billion) in 2022. That trend already doesn’t look particularly propitious. What’s more, Perlin estimates that Rocket’s profits will decline by about 35% this year as compared to last ($2.66 per share) — and then slacken a further 38% to $1.65 per share in 2022.

Perlin is not alone in playing it safe on RKT, as TipRanks analytics exhibit the stock as a Hold. Out of 10 analysts tracked in the last 3 months, 3 say Buy, 5 suggest Hold, and 2 recommend Sell. With a potential loss of ~38%, the stock’s consensus target price stands at $25.67. (See RKT stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.