Rocket Companies (NYSE: $RKT) went public August 6th, 2020 as one of the fifth largest U.S. IPO’s in the past five years. The company is made up of three well known names, among others, Rocket Mortgage, Rocket Homes, and Rocket Auto.

For the first three quarters of 2020, RKT generated $6.6B in net income. Yes, you read that right- $6.6 Billion! Rocket Companies prides themselves on the ability to be a cash flow generator. The 4th quarter earnings results are expected to be released on February 25th, 2021.

Quick Recap From Q3 2020

  • Rocket Mortgage established a marketing relationship with realtor.com
  • Rocket Mortgage partnered with Mint by Intuit to provide a simplified refi experience
  • Company’s board of directors approved a share repurchase program of $1B November 2020

Besides the share repurchase program, rocket is executing on its digital strategy by partnering and entering relationships with companies that have technology of the future. Mint by Intuit as an example, takes into account a high level of trust from the consumer to give up their personal and financial data to be summarized in one place. Who’s there right along side? Rocket Companies.

“We think we’re a technology company that happens to do home loans”

Dan Gilbert, Chairman from CNBC Interview

Most of us have either tried to purchase or purchased a home and know that it can be a miserable experience. No offense to real estate agents, but your job will be replaced by technology. I believe one of the top investing themes of the 2020’s will be online real estate. We will be buying houses through technology and the internet.

Rocket Companies is in a great spot for future technology advancements in real estate mortgages and automotive mortgages.

Where Rocket Revenues Come From

The company breaks down its revenue into four different categories: gain on sale of loans, loan servicing income, interest income, and other income.

The main focus of Rocket Companies revenue should be on the sale of loans or loan origination, which brought in a total of $10.8B for nine months ending Sept. 2020. Accounts for about 89% of Rocket Companies total revenue for 2020.

Since we do not have much historical data, we will have to see the results to assess the impact of expanding the partner network. We need to see if the marketing and influencer relationships will drive additional revenue in the coming years. We highlighted one of the marketing relationships with realtor.com above and a potential influencer relationship with Mint.

Another portion of revenue worth mentioning comes from the sale of the loans to the secondary market to either government backed entities or investors. According to their S-1, 91% of those loans originated are sold within three weeks of origination, which is good news in terms of liquidity considering Rocket Companies has to pony up the capital.

Mortgage Forbearances

There was a lot of news hype around COVID mortgage forbearances. Most news anchors said it could catastrophically destroy the real estate market once consumers had to finally pay. All of the media play on it ended up being just hype, at least for Rocket Mortgage. The total amount entered in forbearance ending in Q3 was 4.6% of their portfolio, which was actually down from 5.1% in Q2.

Loan Origination Volume Surging

Rocket Companies certainly generates cash from loan origination. With a real estate market on fire, I could see a short term upside with more volume. What I have difficulty seeing is sustainable long term growth in loan origination volume. Below reflects the volume has more than doubled since 2018.

Rocket Companies will have to take an aggressive approach to gaining market share to continue surging loan origination volumes. Despite the top line growth challenges, Rocket Companies is an interesting play. The stock price is basically at its IPO level or below at approx. ~$20.50. Expect great numbers for the year and quarter.

At the time of publication, the author of this article does not hold shares of RKT.