Rocket is buying Redfin.
Tons of synergies make this an attractive bet for Rocket. Financial services are about scale. And this move solidifies Rocket's attempt to rule the real estate technology space.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
TLDR Summary
America’s largest mortgage originator is buying one of the leading homebuying marketplaces in an all share transaction valuing Redfin at $1.75bn and just under 2x revenues. Investors don’t like the deal. While Redfin is up 70% on the news, Rocket is down 15%. Together, they have wiped out $4bn in market cap after the announcement.
This sell-off is surprising. Even if you think Redfin will never make money, the present value of the synergies alone is likely larger than its entire current market cap, making this an attractive bet from Rocket’s perspective.
Additionally, there is upside if Redfin does finally figure out how to convert their reach and their technology into profits. They went through various restructuring programs and are guiding to reach EBITDA breakeven this year. Actual bottom-line profitability is further away. But I don’t think that says much given where the real estate cycle currently stands. The product itself is working with growing market share. Revenues are 150% higher than in 2018 against a brutal macro environment right now. They should make money once homebuying picks up again.
Scale is everything in financial services and this move solidifies Rocket’s ambition to be the leader in the real estate technology space. In addition, both companies are bets on falling mortgage rates. Their combined beta to the 30-year mortgage rate is likely between 0.3 and 0.4, meaning a 1% drop in the mortgage rate will make them run 30-40%.
The original thesis for Rocket
Rocket is the largest mortgage originator in the US. They achieved this by building out a superior technology suite that enables them to acquire and retain customers cheaper than their peers. As a result, they have been able to outspend their competitors on marketing which has led to substantial and consistent market share gains over time. And in their latest investor day, management has laid out quite ambitious plans for further market share gains.
Check out the articles below for additional background on the company. They do have a quite complicated revenue recognition which is worth studying to understand the company. I explained that in detail in the original investment case in 2022.
