Rocket Companies Earnings: Low Mortgage Origination Volume Leads to Another Quarter of Losses

Narrow-moat-rated Rocket Companies RKT reported weak earnings as the company remains under pressure from difficult mortgage conditions in the United States as higher interest rates reduce origination volume. Rocket’s adjusted net revenue, which excludes a negative $216 million mortgage servicing right valuation change, fell 54% from last year, but rose 29% from last quarter to $882 million. After falling out of profitability last quarter, Rocket continues to operate at a loss, losing $0.16 per share versus a gain of $0.40 last year. As we incorporate these results, we do not plan to materially alter our $13 fair value estimate for Rocket. We see the shares as undervalued on a full cycle basis, but would emphasize to investors that Rocket is highly leveraged to the mortgage cycle and will likely continue to report poor results until mortgage conditions improve.

Mortgage origination volume, the primary driver behind Rocket’s revenue, fell 69% from last year and 11% from last quarter to $16.9 billion. On a relative basis, Rocket’s direct to consumer channel continued to underperform its lower-margin partner network, with volume decreasing 76% from last year compared with 75%, though the gap did narrow from the previous quarter. Negative mix shift alongside heavier use of promotional products caused the firm’s average gain on sale margin to fall to 2.39% from 3.01% last year, though this is a noticeable improvement from the 2.17% the company reported last quarter.

Despite the severe decline in revenue and its recent losses, Rocket remains in a good financial position, aided by significant cost-cutting efforts. Rocket operating expenses declined 23% from last year to $1.08 billion, limiting its cash burn. Rocket also retains a strong balance sheet, with $3.3 billion in cash and self-funded mortgages in addition to $6.7 billion in mortgage servicing assets held against around $4.4 billion in non-mortgage-related debt.