Ellie Mae Hit With Downgrade On Valuation, Mortgage End Market Challenges

Ellie Mae Inc ELLI is lingering near all-time highs that were struck and subsequently surrendered throughout the last year.

The Analyst

JPMorgan analyst Sterling Auty downgraded Ellie Mae from Overweight to Neutral and raised the price target from $112 to $125.

The Thesis

Investors were found to value software above intrinsic cash flow valuations, so JPMorgan adjusted its price target calculation to reflect revenue multiples rather than discounted cash flow, Auty said in a Thursday note.

Even with the resulting fair-value increase, Ellie Mae is not seen to have upside potential that rivals the rest of JMorgan’s coverage group. Its momentum in market share gains is stunted by a challenged mortgage market, the analyst said.

“We continue to believe that ELLI has one of the best franchises in the space and in vertical SaaS,” Auty said. “We also continue to believe the company will be successful in moving upmarket, but the end market remains challenged and is expected to continue to be challenged until at least the beginning of 2019.”

The impact of resulting end customer headcount reductions and changes in the amount of resources consumers allocate to the mortgage market are unknown, according to JPMorgan.

In the meantime, Ellie Mae is benefiting from a customer base that's shifting toward purchases and reducing exposure to refinancing, Auty said. 

Price Action

Ellie Mae shares were down 2 percent at the time of publication Thursday at $111.17.

Related Links:

BofA Shifts To Neutral Stance On Ellie Mae, But Says Long-Term Growth Projections Are Unchanged

Barclays Projects Acceleration In Ellie Mae's Mortgage Volume Growth