AI Adoption Will Reduce Costs But High Marketing Spend May Impact Future Earnings

Key Takeaways

• AI-driven automation efforts aim to enhance efficiency and improve net margins, though increased marketing spending might not proportionately boost revenue.
  
• Expanded mortgage portfolio and new products could boost market share, but competitive pressures and high costs may impact margins and earnings growth.
  
• Investment in AI and brand strategy enhances operational efficiency and consumer engagement, supporting sustained revenue growth and competitive advantage in fluctuating markets.

Catalysts

Provides spanning mortgage, real estate, and personal finance services in the United States and Canada.

• Rocket Companies' strategic focus on AI-driven automation is expected to drive significant efficiency gains and streamline operations, which may impact operating expenses and result in improved net margins.
  
• The company is heavily investing in marketing and rebranding efforts, including a Super Bowl ad and the launch of Rocket.com, which could increase customer acquisition costs without a proportional increase in revenue, impacting earnings.
  
• Rocket's expanded servicing portfolio and increased market share in purchase mortgages suggest a heavy reliance on sustaining recapture rates and maintaining high service levels, which require ongoing investment, potentially impacting net margins.
  
• The commitment to roll out new affordable home buying products and the strategic expansion of offerings could expose Rocket to competitive pressures without guaranteed revenue increases, potentially affecting future revenue and earnings growth.
  
• The integration of technology platforms across channels aims to increase origination volumes in both retail and wholesale, yet requires substantial upfront investment and may not immediately translate into higher earnings, affecting short-term financial performance.

Rocket Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rocket Companies's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $1.08) by about March 2028, up from $29.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.1 billion in earnings, and the most bearish expecting $156 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.1x on those 2028 earnings, down from 79.1x today. This future PE is greater than the current PE for the US Diversified Financial industry at 16.2x.
• Analysts expect the number of shares outstanding to grow by 5.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

Rocket Companies Future Earnings Per Share Growth

Risks

• Rocket Companies' strong financial performance, with a 30% year-over-year increase in adjusted revenue and significant gains in efficiency through AI, suggests continued revenue growth and improved net margins.
  
• The expansion of Rocket’s servicing portfolio by 17% and their strategic focus on purchase market share growth provide a solid foundation for future revenue and earnings stability, even in fluctuating market conditions.
  
• Their investment in technology, such as AI-driven platforms, significantly increases operational efficiency by saving over a million team hours, thereby enhancing profit margins and allowing more investment into revenue-generating initiatives.
  
• The strategic brand refresh and highly effective marketing campaigns, including the high-profile Super Bowl advertisement, have substantially increased brand awareness and consideration, potentially driving higher consumer engagement and sales growth.
  
• The Rocket Superstack platform, leveraging AI for customized client interactions and streamlined mortgage processes, provides a competitive edge that could sustain or even increase earnings despite market volatility.

Valuation

• The analysts have a consensus price target of $13.714 for Rocket Companies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.5 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 36.1x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $15.77, the analyst price target of $13.71 is 15.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.