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

Other software stocks present a more compelling near-term risk-reward profile than Ellie Mae Inc (NYSE: ELLI), according to Bank of America Merrill Lynch. 

The Analyst

Analyst Brad Sills downgrades shares of Ellie Mae, a cloud-based platform provider for the mortgage finance industry, from Buy to Neutral and lowered the price target from $110 to $95. 

The Thesis

Headcount reductions of 10-15 percent appear to be occurring at mortgage lenders that use Ellie Mae software as a result of rising rates, low inventory and declining margins per loan, Sills said in a Monday note, citing recent calls with customers and partners. (See the analyst's track record here.) 

Near-term volume dislocations are likely to arise from possible user attrition, capping any upside to BofA's estimate for 12-13 percent organic revenue growth in 2018 — something that will weigh on sentiment, the analyst said. 

BofA's long-term view on the company is unchanged, with projections that Ellie Mae can continue to gain share in the mid-lender LOS market, generate higher ASP from cross-selling and price increases and demonstrate gross margin expansion from a migration to Amazon.com, Inc. (NASDAQ: AMZN)'s AWS at the end of 2019.

When Ellie Mae reports Q1 results after the close April 26, Sills said he's comfortable with BofA's revenue and earnings estimates of $107.9 million and 8 cents per share, respectively.

BofA maintained its 2018 revenue and earnings per share estimates for Ellie Mae. 

The Price Action

Ellie Mae shares have shed 3.3 percent over the past year. The stock was up 0.43 percent at the time of publication Monday afternoon. 

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