Update: Ellie Mae Weakness Gives us a Buying Opportunity

(Published July 29, 2017)

Thursday night, Ellie Mae (ELLI) reported earnings and guidance that disappointed the Street.

The stock closed down 17.5% Friday, with lowered guidance weighing heavily on shares. In terms of the most recent quarter, earnings results were in line with our previous thoughts, but revenue did come in about 5% light, so there is some valid concern in arena, but the company is managing the bottom line. ELLI also added another 9,600 bookings to its Encompass platform, so despite a slowdown, there is still growth, which creates a consistency in revenue. Full-year revenue midpoint was lowered from to $402.5 million from $436.5 million and earnings will be closer to $1.13 per share.

Rising rates led to a lower refinance volume. Combined with a tight housing inventory, new home loans were also constrained. This is akin to a perfect storm in terms of a mortgage software provider.

The company appears to be conservative with its guidance as it waits for the market transitions from a refi market to a purchase-driven market. When we initiated coverage on the stock, we acknowledged the likelihood of high volatility with price and suggested a small initial entry. Furthermore, we acknowledged as investors, we’d be willing to tolerate lower growth numbers of active and contracted users along with lower margins if we were in a rising-interest-rate environment when industry-wide bookings were falling in July

That is precisely what happened this past quarter.

Lastly, we suggested augmenting the small initial purchase with more aggressive buying under $100, which has occurred this morning providing plenty of opportunities to purchase the stock in the $80s based on our July 5 view.

Read the whole original trade view of ELLI posted on July 5, 2017.

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