Analyst Says Rocket Companies' $18 IPO Price Is Fair For Now

Rocket Companies Inc RKT shares initially spiked from the $18 IPO price to as high as $26.86 last week, but the stock has since come back down to within $1 of that IPO price. One analyst said Thursday the stock is now back where it belongs.

The Rocket Analyst: Susquehanna analyst Jack Micenko initiated coverage of Rocket Companies with a Neutral rating and $18 price target.

The Rocket Thesis: Micenko said few companies have embodied the shift in the mortgage origination business away from banks and toward non-banks better than Rocket Companies, which is the parent company of Quicken Loans. Micenko said, however, that the risk-reward balance seems appropriate for the stock at its current valuation.

Mortgage origination accounted for 70% of Rocket’s revenue in fiscal 2019, and direct-to-consumer originations accounted for 64% of that revenue. Mortgage servicing made up 16% of fiscal 2019 sales.

Rocket’s market share of the mortgage market has risen significantly from 1.3% in 2009 to more than 9% in the first quarter of 2020. In addition, the company’s origination volumes have grown 19% annually in that stretch.

Related Link: Experts React To Rocket Companies' Liftoff After IPO Fundraising Misses Target

While Rocket Companies is a leading tech-based mortgage origination platform, Micenko said almost all originators are employing similar technology at this point. Rocket has a strong balance sheet and valuable brand, but he said investors buying the stock today are likely buying at a cyclical peak in earnings.

“The challenge unfortunately is that while EBITDA margins for RKT are comparable to fintech margins today, they are highly dependent on volume and not sustainable through the cycle,” Micenko wrote in a note.

The mortgage operations business is more cyclical with less recurring revenue than most fintech businesses, Micenko said.

Benzinga’s Take: The strength of Rocket’s business is tied to the overall U.S. economy and the housing market in particular, as well as low interest rates. On Thursday, Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp FMCC announced they're raising fees on mortgage refinancings to help protect against elevated risk due to the pandemic.