Issue #12: Making billions from retail investors and the future of loans 🚀
Let's get into this week’s report. Here’s what we found:
- Another "Robinhood of China" that has grown revenue by 212% year on year.
- A rapidly growing fintech company that's automating real estate, mortgage and financial services.
Futu Holdings Limited ($FUTU)
$144.70 - Share price at time of writing
- Futu Holdings is a digital brokerage and wealth management platform. Think of it as China's equivalent to Robinhood in the US.
- Futu grew 2020 revenues by a stunning 212% YoY.
- Futu is a close competitor of Tiger Brokers a stock we covered over a month ago.
- There are still concerns about the company's large dependence on its brokerage business and the license issues in mainland China.
What they do:
Futu is an online brokerage and wealth management platform based in Hong Kong.
They also have wealth management divisions, margin lending services, financial news/market data information services.
Futu also has social media tools baked into its services. This has allowed them to create a network centered around their users connecting users, investors, companies, analysts, media and key opinion leaders.
Why they’re spiking in interest:
According to Marketstream.io, Reddit mentions of FUTU increased by 1000% when comparing the end of March 2021 to the beginning of April 2021.
The growth in mentions happened around the same time news was released that eight analysts upgraded their revenue forecasts for the company. This likely drove the increased hype and interest from the Reddit community.
Their closest competitor Tiger Brokers was mostly flat in Reddit mentions during the same period.
💸 Signal: In Q4 2020 billionaire hedge fund manager Jim Simons increased his position in FUTU by 82.7%, purchasing over 23,900 shares. While Ken Griffin increased his position by over 350% in Q3 2020. Both investors are currently still holding these shares. Source - cheaperthanguru.com
Why FUTU could be valuable:
Futu has the advantage and technical know-how gained from being one of the first movers to offer completely online-based trading in China.
This advantage has allowed them to rapidly improve the technology they use to offer trading, clearing, and risk management services, all of which have been key to the growth of the business.
Better technology has allowed them to improve the user experience. Futu is now the largest and the most licensed online securities company in China. Putting Futu in a position to develop its own trading system and control the entire trading process without relying on third parties.
Futu also has a social network collaboration platform called NiuNiu Community.
The platform has news, research data, short videos, recorded lessons, chat rooms, and live broadcasts to help users find investing ideas.
The competitive advantage here is that Futu uses the platform to observe user behavior and identify user pain points. This allows Futu to improve the platform and customer experience which all contribute to higher user satisfaction and increased engagement.
Futu's paying customers increased by 137% to 418,000 in 2020. The company has over 7 million users that use their news platforms.
They also have over 1 million registered users (unfunded accounts), which means Futu has plenty of opportunities to convert more users into paying customers.
What the risks are:
There is intense competition with other financial institutions in Asia that offer similar brokerage investing services.
There is also intense competition from similar fintech brokerage businesses within the same ecosystem such as WeBull and eToro.
Futu has signaled they gradually want to bring down commissions through a loss leader approach. This might erode profitability and revenue growth over time (similar to Tiger Brokers).
Rocket Companies Inc. ($RKT)
$22.98 - Share price at time of writing
- Initially operating as a mortgage business, Rocket Companies now allows customers to find a real estate agent, a personal loan or a car.
- Its main product differentiators are automated processes, exceptional client experience and visibility into transactions.
- Q4 2020 showed incredible earnings growth of 162% year on year.
- The company is targeting strong future growth, with expansion expected in automotive, e-commerce and insurance business segments.
What they do:
According to their website, Rocket Companies "provides industry-leading real estate, mortgage and financial services, empowering consumers through entities including Rocket Homes, Rocket Auto and Rocket Mortgage, the nation's largest mortgage lender."
The company was founded in 1985 by Dan Gilbert, who sold it in 1999 to Intuit (INTU) who then bought it back for a substantially lower amount in 2002. He remains the largest shareholder of the company after taking it public last year.
Why they’re spiking in interest:
According to Unbiastock.com, Reddit mentions of RKT increased by over 390% when comparing the end of March 2021 to early April 2021.
Interest in RKT spiked around the same time news was announced that Rocket Companies CEO Dan Gilbert sold $500m worth of stock to fund the philanthropic project Detroit Initiative.
Overall Reddit users responded positively to the news with some users saying it was another reason to invest in the company.
"I'll buy more $RKT. Dan Gilbert sold $500 mil worth of RKT stock and will use that money to help rebuild Detroit neighborhoods." - Bullwst17
💸 Signal: Billionaire hedge fund managers Ken Griffin and Chris Davis currently hold 4.47 million and 778,000 RKT shares respectively. Source - cheaperthanguru.com
Why RKT could be valuable:
Rocket’s business model has much more to it than just rapidly processing mortgages. It also uses analytics to provide clients with real-time quotes and access to mortgage calculators to help them choose the right solutions to support their financial goals. It also provides end-to-end visibility into transactions.
The company operates through two segments: Direct to Consumer and Partner Network.
In the Direct to Consumer segment, they engage directly with clients using various performance marketing channels. While in the Partner Network segment, Rocket aligns its brand with partners who use its platform to provide their clients with differentiated mortgage deals.
Unlike many of its tech-focused and high-growth peers, Rocket isn’t still working out how to turn its high growth into profit for shareholders. Their Q4 2020 earnings presentation, showed their EBITDA of $11.1 billion is up 472% from $1.9 billion in 2019. The company also returned cash to shareholders through a special $1.11 per share dividend in March 2021.
Their future growth prospects look strong too. Rocket recently overtook Wells Fargo to become the largest mortgage originator in the US. They also plan to use their ability to pivot and utilize their technology platforms into different industries.
Their recent 10-K shows positive developments in their auto car sales (31% increase year on year), Amrock Insurance (110% increase year on year) and Rocket Homes brand (assisted in $1.6 billion real estate transactions in Q4 2020).
What the risks are:
The current low interest rate environment means there are more people looking for new homes as well as current owners looking to refinance.
Any increase in interest rates may result in a decline in the number of deals Rocket can process. Since higher rates will slow demand for new home purchases and refinancing agreements as they become more expensive.
Competition in the mortgage space is heating up. With several competitors going public or planning to go public in the near future. These include:
- United Wholesale Mortgage (went public via SPAC UWM Holdings)
- Finance of America (went public via SPAC Replay Acquisition)
- Caliber Home Loans (delayed in October but 'HOMS' is still pending)
- LoanDepot.com (filed registration statement to go public with SEC)
- AmeriHome (updated registration statement to go public with SEC)