1 Hot Housing Stock Wants Out

The housing market isn't apparently just a seller's market for those looking to unload properties that have appreciated greatly since last year.

Shares of Ellie Mae  (NYSE: ELLI  ) moved 3% higher in the closing minutes of trading yesterday after a Reuters article reported that the mortgage industry solutions provider is putting itself up for sale. Two sources are telling Reuters that Ellie Mae is hiring Morgan Stanley to smoke out a suitor.

You can't blame Ellie Mae for sizing up the market. Just as someone may be tempted to sell a home given the recent rebound in prices, Ellie Mae's stock has been on fire since going public at $6 two years ago. After a quiet 2011 where it actually closed out the year as a busted IPO, shares of Ellie Mae soared 391% last year.

This year has been a relative disappointment. The stock is up a mere 8% in 2013 after yesterday's pop. However, with real estate portals Zillow (NASDAQ: ZG  ) and Trulia (UNKNOWN: TRLA.DL  ) up 257% and 158%, respectively, this year, it's safe to say that investors are still drawn to the companies that are cashing in on the rebound in the residential real estate market.

Ellie Mae offers on-demand automation tools for the mortgage industry. Roughly a fifth of the country's mortgages flow through its Encompass platform and its Ellie Mae Network.

Why is Ellie Mae cooling down as Zillow and Trulia are heating up? Well, Ellie Mae is at the mercy of the mortgage market. After the refinancing boom as interest rates bottomed out last year and this year's spike in home purchases, the market's started to cool as interest rates rise. If mortgage originations dry up, Ellie Mae is stuck trying to gain market share. That's something that it's been able to do in the past as a one-stop shop for mortgage processing, but it still has all of its eggs in the mortgage basket. Zillow and Trulia stand to benefit from a shift to rentals or even the desperation of brokers to drum up leads if buying demand thins out.

Ellie Mae could simply be feeling mortal. After blowing analyst profit targets every single quarter since its IPO, Ellie Mae merely met expectations last time out. 

Wall Street is still banking on growth here, targeting revenue to climb 30% this year and another 22% come 2014. That's the kind of growth that is worthy of Ellie Mae's lofty multiple of 22 times next year's expected earnings, and it may still command a healthy premium to that of a private equity firm or larger financial services firm that can build on Ellie Mae's business in a way that it may not be able to do on its own.

It is a seller's market out there. You can't blame Ellie Mae for exploring the sale of its appreciated property.

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9/23/2016 4:02 PM
ELLI $99.66 Up +0.42 +0.42%
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