What a year it has been for Ellie Mae Inc (NYSE:ELLI)!
The company rang the NYSE opening bell on Feb. 4, in part to commemorate its 15th anniversary. It also served, unofficially, as a recognition as one of the Exchange’s best-performing stocks last year. Ellie Mae’s market cap quadrupled in 2012 alone, and its share price jumped from an IPO of $6 in 2011 to north of $21 today. That’s a nice 250% gain for shareholders in less than two years.
Many skeptics would look at a run-up like this and be quick to assume that the company is due for a pullback. But looking deeper into the underlying business, it’s clear that Ellie still has plenty of room to run.
My bullish conviction centers around two key aspects:
- Ellie Mae brings value to their customers
- Ellie Mae has an asset-light business model that is highly scalable
Value to the Customer
Ellie Mae Inc (NYSE:ELLI) is a leading provider of on-demand, automation solutions for the $1.6 trillion annual U.S. mortgage origination industry. It uses software and cloud computing to help regional lenders initiate new mortgages. In layman’s terms, Ellie Mae makes it easier for lenders to make new loans.
And there are quite a few lenders that want to make new loans. The company estimates there are 190,000 mortgage professionals in the US (which excludes the megabanks such as Citigroup Inc. (NYSE:C) or Wells Fargo & Co (NYSE:WFC), who also initiate mortgages), with an addressable market of $2 billion – $3 billion. Ellie did just over $100 million in revenue last year. So the pond is clearly large enough for it to make a bigger splash in.
But here’s the kicker. For better or for worse, the now-infamous subprime mortgage fiasco gave birth to a very important new trend: regulation. New regulations imposed by the Dodd-Frank Act, combined with new disclosures required by the Consumer Financial Protection Bureau, make being compliant in new loans issued increasingly difficult. It’s not just getting harder to obtain a mortgage these days. It’s also getting harder to provide them.
The key takeaway is that this new trend of increased regulation has opened the door of the whole industry to disruption. Being compliant is a headache. It’s a hassle. Unless you’re a glutton for punishment, going through hundreds of disclosures and regulations is something that you don’t really want to deal with.
As a mortgage professional, what you do want to deal with is 1) making the greatest number of new, high-quality loans that you can (which in essence makes you the most money); and 2) making sure that you’re compliant with all of the above-mentioned federal regulations.
Enter Ellie Mae.
Ellie takes care of all of the behind-the-scenes dirty work to ensure that your loans are compliant. They monitor regulations and provide their best-in-class Encompass 360 software. On top of all of that, they don’t charge you until your new loan goes through.
For these reasons, I believe that Ellie Mae Inc (NYSE:ELLI) is offering a win-win scenario. They provide a service that guarantees compliance in exchange for a nominal fee on top of completed transactions. That’s a business model that brings value to their customers.
