Financial service provider Rocket Companies (NYSE:RKT) has had a wild ride recently and it has taken the investors on a ride too. After its IPO debut at $18 last year, RKT stock went as high as $43 in March.
Fewer than three months later, the stock went below the IPO price and gave an opportunity to investors to bag the stock.
It was trading close to $16 in May and is currently exchanging hands at $20. Despite reporting strong financials, what led to the slump in this IPO darling?
After recovering from the fall below its IPO price, there are chances that the stock may stabilize, but a lot depends on the housing market. There are mixed opinions when it comes to the future of the stock.
InvestorPlace’s Will Ashworth discussed why RKT stock is an excellent bet at the current rate. I do like my colleague’s optimistic approach with the stock, but if you are committed to being a risk-taker here there are some red flags.
Let’s dig deeper into them and take a closer look at the investment case for RKT stock.
Increasing Competition
As financial institutions and even organizations outside the finical services sector are making strong moves towards the digitization of their business.
Rocket Companies will have to face stiff competition that very weel may take some share of RKT over the year.
With the opening of economies, banks will also return in full force and this is when Rocket companies will have to prove itself. The competition is only going to increase and it will be interesting to see how Rocket manages to handle it.
There is rising concern over inflation and it is expected that the interest rates will spike soon. It is unlikely for the rates to remain as low.
This means the cost of funding for lenders and borrowers will increase. Such a rise could have a negative effect on the housing market. Whenever mortgages become expensive, it hurts RKT’s business.
Further, due to the pandemic and closing of businesses, a lot of families moved to suburban areas to save on rent. With vaccine rollout and economics opening up, it’s possible that suburbs will fail to attract families any longer.
The housing market is undergoing transition and there are many forces that can slow down the growth of the company. At this stage, I wouldn’t recommend RKT stock at these levels. The company needs to be able to scale while handling the change in interest rates.
The Bottom Line on RKT stock
If you want to invest in RKT stock, keep these risks in mind. They may continue to have an impact on the growth of the company for the rest of the year.
I am not the only one, Wall Street shares my opinion on Rocket Technologies. Wedbush analyst Henry Coffey has lowered the price target of RKT stock to $14 and has a neutral rating.
Further, Morgan Stanley analyst James Faucette also lowered the price target on the stock to $18 from $24 with an “equal-weight” rating.
Despite strong historical revenue growth, Rocket Companies has several external factors that can slow down its growth. The low interest rates that supported its growth in the past will not remain the same for the long term. To top it off, competition will only get more intense with each day as new players enter the industry.
The company is lagging momentum and there is not much to look forward to at this stage. In short, Rocket Companies is not worth the risk even at the low levels.
It is best to wait and watch how the housing market moves and then consider your investment in the company.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
