Rocket Remains Pressured by Weak Mortgage Market Conditions in Q4

Narrow-moat-rated Rocket Companies RKT reported weak results that were in line with our expectations as a difficult mortgage market continues to be a major headwind to the firm. Rocket’s adjusted net revenue fell 72% from last year and 23% from last quarter to $683 million. The company fell out of profitability during the quarter, reporting a net loss per share of $0.14 compared with a gain of $0.32 last year, inclusive of a negative $202 million adjustment on the value of the company’s mortgage servicing rights asset book. As we incorporate these results, we do not plan to materially alter our $13 per share 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 due to its relative strength in the more volatile refinance market and its results will remain poor until market conditions improve.

Mortgage origination volume, Rocket’s primary source of revenue, fell 75% from last year and 26% from last quarter to $19 billion. On a relative basis, Rocket’s direct to consumer channel underperformed its partner network, decreasing 76.3% compared with 70%. This mix shift toward the lower margin partner network channel as well as heavier use of promotional products pushed the firm’s average gain on sale margin to 2.17% from 2.80% last year. Rocket has seen better performance on pricing so far in 2023, and the firm expects net revenue to be between $700 million and $850 million in the first quarter.

On a positive note, Rocket continues to cut costs faster than initially expected, a necessity given one of the hardest mortgage markets in decades. The company exceeded its guidance $50 million to $100 million in sequential cost reductions by reducing its expense run rate by $202 million from the third quarter. As a result, total operating expenses were down 43.2% year over year and 17% sequentially at $986 million.