Is Rocket Companies' Stock Overvalued Or Undervalued?

Rocket Companies Inc RKT shares have lagged the S&P 500 in 2021, generating a year-to-date total return loss of 28.5%.

Rocket stock has had a wild ride since its 2020 IPO, but investors may be wondering whether there’s any value in Rocket shares after the recent pullback.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value.

For comparison, the S&P 500’s PE is currently at about 28.7, nearly double its long-term average of 15.9. Rocket’s PE is 9.0, less than a third of the S&P 500 average as a whole.

Related Link: Rocket Companies Expands Fintech Presence With $1.27B Truebill Acquisition

Growth: Looking ahead to the next four quarters, the S&P 500's forward PE ratio looks much more reasonable at just 20.8. Rocket’s forward earnings multiple of 10.0 is still less than half the S&P 500’s, making Rocket look undervalued.

Rocket’s forward PE ratio is also more than 30% lower than the average multiple of its financial sector peers, which are averaging a 17.7 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process.

The S&P 500’s overall PEG is currently about 1.0; Rocket doesn’t have a PEG because it is not expected to grow earnings in the next four quarters.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.11, well above its long-term average of 1.63. Rocket’s PS ratio is 2.02, significantly lower than the S&P 500 average as a whole. Rocket's PS ratio is also up 377.5% over the last past year, suggesting the stock is priced at the high end of its historical valuation range.

Finally, Wall Street analysts see value in Rocket stock over the next 12 months. The average analyst price target among the 14 analysts covering Rocket is $17.75, suggesting 22.8% upside from current levels.

The Verdict: At its current price, Rocket stock appears to be undervalued based on a sampling of common fundamental valuation metrics.

Photo: Susan Q. Yin via Unsplash