AI Investments Will Revolutionize US Mortgage Servicing Efficiency

Key Takeaways

• Heavy investment in AI for efficiency and cost savings is aimed at boosting net margins by improving mortgage servicing processes.
  
• Strategic in-house servicing and a growing broker channel are expected to improve customer retention, drive revenue growth, and potentially enhance operational scalability.
  
• The company's financial volatility, strategic risks in insourcing, pricing power pressure, limited revenue diversification, and governance concerns may impact investor confidence and profitability.

Catalysts

Engages in the origination, sale, and servicing residential mortgage lending in the United States.

• UWM Holdings is investing heavily in technology, particularly AI, to become the most efficient mortgage servicer in the U.S., which is expected to result in significant cost savings between $40 million and $100 million annually, positively impacting net margins.
  
• The strategic decision to bring mortgage servicing in-house is aimed at controlling the process, reducing costs, and improving service levels, potentially boosting customer retention and revenue through better recapture rates.
  
• The mortgage broker channel has been growing, now capturing 28% of the market share, up from 19.7% in 2022. This growth supports increased production volumes, which are likely to drive revenue growth.
  
• UWM's operational excellence enables rapid scaling during favorable market conditions, as evidenced by their ability to double daily production levels during brief periods of low rates, suggesting potential for significant revenue increases during rate drops.
  
• Plans to increase the share float via a consistent 10b-5 program and the continuation of regular dividend payments could enhance investor sentiment and stock liquidity, potentially supporting stock price growth and stronger EPS metrics.

UWM Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UWM Holdings's revenue will grow by 25.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.4% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $402.6 million (and earnings per share of $1.87) by about May 2028, up from $-8.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.0x on those 2028 earnings, up from -102.1x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

UWM Holdings Future Earnings Per Share Growth

Risks

• The $247 million net loss, inclusive of a $388 million reduction in the fair value of the MSR portfolio, raises concerns about earnings volatility and the impact of uncontrollable market conditions on financial results.
  
• Moving servicing in-house involves strategic investment risks, including potential one-time costs and execution challenges in transitioning operations, which could affect net margins and operational efficiency.
  
• UWM's lower gain on sale margin of 94 basis points in Q1, compared to historical trends, indicates pressure on pricing power and could impact profit margins if not effectively managed in future quarters.
  
• Heavy reliance on fixed-rate loan production without adaptive flexibility to changing interest rate environments, including adjustable-rate mortgage opportunities which they deem less viable, might limit revenue diversification.
  
• Mathew Ishbia's control over 87% of shares and plans to increase market float involve potential shareholder dilution and governance risks, which could affect investor sentiment and stock price stability.

Valuation

• The analysts have a consensus price target of $7.0 for UWM Holdings 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 $10.0, and the most bearish reporting a price target of just $4.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $402.6 million, and it would be trading on a PE ratio of 42.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $4.07, the analyst price target of $7.0 is 41.9% higher.
  
• 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.