Shareholders of Rocket Companies would probably like to forget the past six months even happened. The stock dropped 24.5% and now trades at $14.38. This might have investors contemplating their next move.
Is there a buying opportunity in Rocket Companies, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Rocket Companies Not Exciting?
Even though the stock has become cheaper, we're swiping left on Rocket Companies for now. Here are three reasons you should be careful with RKT and a stock we'd rather own.
1. Revenue Spiraling Downwards
Net interest income and and fee-based revenue are the two pillars supporting bank earnings. The former captures profit from the gap between lending rates and deposit costs, while the latter encompasses charges for banking services, credit products, wealth management, and trading activities.
Rocket Companies struggled to consistently generate demand over the last five years as its revenue dropped at a 16.5% annual rate. This wasn’t a great result and signals it’s a lower quality business.
2. Projected Net Interest Income Growth Is Slim
Forecasted net interest income by Wall Street analysts signals a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Rocket Companies’s net interest income to drop by 10.6%
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Rocket Companies, its EPS declined by 43.4% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Rocket Companies isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 1.6× forward P/B (or $14.38 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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