Sept Idea Comp - Rocket Companies $RKT
Interest rates for mortgages are above 6%. Mortgage demand falls to a new 22-year low, according to Forbes. Home sales dropped 19% in July.
Why would anyone be buying shares of mortgage companies when this is the current environment of the real estate market?
Interestingly, it's the insiders of $RKT that are buying the dip. And in this memo, I will explain the possible reasons why insiders are bullish on Rocket and why this company is a great investment.
First, Rocket's business structure has been starting to look more like a bank than an internet startup.
Over the past few years, Rocket has been filling its balance sheets with mortgages that it originates. Before, it would sell its mortgages to Fannie Mae or Freddie Mac for securitization. Now, it's starting to hold onto those loans and reaping the cash flow from it.
And with mortgage payments surging throughout 2022, Rocket is seeing its inflation skyrocket along with it.
Insiders know that with surging mortgage payments, $RKT will have a lower impact on its revenues. Loan origination volume is down but at least the loans that they originate and hold will provide them with cash flow during these hard times.
Another thing is that Rocket is leading the consolidation of the home mortgage industry. The home mortgage industry is highly fragmented with many mom-and-pop shops. As Rocket gains more market share, the company will see higher profits overall and have more power over its industry.
In this slide, we can see that Rocket Mortgage has less than 10% of the mortgage market. When compared to other companies like $SCHW $AMZN $INTU and $BKNG, all who lead the consolidation of their own industries, Rocket could reap a similar level of fortune as those other companies if it can gain a similar percentage of market share as those industry leaders.
And based on the growth of Rocket's market share in the mortgage market, I am confident that the company can reach its targeted threshold of above 20% market share.
When a company gains market share, if they're not efficient, then it can lose its gains to a competitor that's more efficient. According to Rocket, they're way more efficient than the average mortgage company. As their loan volumes have grown over the past several years, they've shown success in scaling their business. This is proven by the number of loans per production team member per month metric (below).
Outside of mortgages, Rocket has a personal finance app that they obtained through its acquisition of Truebill. The best part about this business is that its annual recurring revenue (ARR) is over $100 million. Like the mortgages it holds, Rocket's premium membership plan for its personal finance app is also bringing more recurring revenue to the business. Investors love recurring revenue business whether times are good or bad.
Rocket has other business lines too, like providing auto and solar loans. There are many cross-selling opportunities for the company. While most of these non-mortgage businesses are small, over time, they will grow into something bigger.
But for now, let's appreciate that Rocket owns the entire home buying process. More money comes to them and little to no money goes to third parties when people buy a home through Rocket.
In sum, I believe that the:
  • large and consistent cluster insider buying
  • gains in market share
  • high efficiency
  • management's efforts to diversify revenues outside of mortgage origination
  • loans on Rocket's books
Rocket will create immense value for investors. While times are tough for the real estate market, Rocket has a strong balance sheet (current ratio of 5.03) that can help the company weather the tough times.
It's possible that Rocket will capitalize on these tough times to acquire its competitors at a lower price and acquire more market share from there. A contrarian move like that could be another reason why insiders continue to buy every dip in this stock.

Or maybe insiders simply like buying a great business at a great price.
Scoreboard Investor's avatar
Had my last mortgage through Rocket. Great customer service and strong presence in the Detroit & the Cleveland area (where we lived). Adding to my watchlist.
Conor Mac's avatar
Never knew they acquired a personal finance app, that's a great way to maintain customer engagement right there. Awesome pitch, thanks!