Rocket Companies (NYSE:RKT) stock had a dismal 2021. And 2022 is hardly off to a better start, as RKT stock has slid into the single digits recently.
Rocket is one of the nation’s largest mortgage originators. And that’s not a great market to be in right now. The price of an average mortgage has surged from 3% to 5% over the past year, leaving potential homebuyers feeling demoralized. Real estate experts say that search activity has dipped in 2022. This suggests the hot housing market is set to cool off. That’s only natural; the boom in 2020 and 2021 was rather abrupt and wasn’t going to go on forever. However, the reversal of fortunes has been grim news for mortgage originators such as Rocket.
In Q4 of 2021, Rocket’s revenues came in at $2.6 billion, which was down a massive amount from the $4.7 billion in the same quarter of 2020. Meanwhile, its costs were virtually unchanged at $1.7 billion. With revenues down nearly 50% but costs barely moving, Rocket’s overall net income slid by more than two-thirds in the fourth quarter.
Analysts had always warned that 2020’s record home buying enthusiasm couldn’t last forever. Still, it’s shocking to see how quickly Rocket’s results have slid. For fiscal year 2022, analysts see Rocket’s earnings dropping 51% from 2021’s levels. They expect to see revenues dropping by an additional 26% in 2022, even after they declined by double-digits for full-year 2021. Rocket was a dirt cheap stock based on 2020 and 2021 earnings, but its valuation looks more balanced against 2022’s projected, much weaker numbers.
Arguably, the most compelling data point for Rocket is its long-term market share growth. Between 2009 and 2014, Rocket grew from 1.3% to 5.1% of the national mortgage origination market. The next few years were quiet for the company, with market share staying at 5% through 2018. Since then, Rocket’s share has soared to 8.8% through full-year 2021. As long as investors believe Rocket has the expertise to manage through multiple market cycles, its value should grow. Rocket isn’t likely to make anything close to 2020 profits again in the near-future, but at some point interest rates will decline again, and Rocket will enjoy another banner year.
The question is whether that’s a good reason to buy RKT stock today. The answer is probably not. At least there’s no rush.
The Federal Reserve is still at the beginning of its interest rate hiking cycle and inflation isn’t going to go away tomorrow. It will take a while for housing to pick up steam again. Mortgage originators such as Rocket should be prepared for several lean years. 2021’s weaker operating results are likely to be followed by even softer numbers in 2022 given the surge in mortgage rates we’ve seen so far this year. That said, as a longer-term investment, it’s hard to fault Rocket’s approach. It has consistently grown market share while paying large dividends and buying back stock. That’s a shareholder-friendly style that should eventually pay off; but don’t count on 2022 being that year.
On the date of publication, Ian Bezek 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.
