Why Ellie Mae Inc. Shares Could Pop 25%

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Ellie Mae  (NYSE: ELLI  ) gained slightly today after Dougherty upgraded the mortgage industry software specialist from neutral to buy.

So what: Along with the upgrade, analyst Raghavan Sarathy planted a price target of $39 on the stock, representing about 26% worth of upside to Friday's close. So while contrarian traders might be turned off by Ellie Mae's rising price in recent months, Sarathy's call could reflect a sense on Wall Street that strengthening industry tailwinds give the stock plenty of room to run.

Now what: Dougherty boosted its 2014 adjusted earnings per share/revenue estimate for Ellie from $0.95/$146.4 million to $0.98/$149.4 million and its 2015 view from $1.16/$172.8 million to $1.25/$185.1 million. "We have been cautious on Ellie Mae shares this year due to difficult mortgage origination environment and back-end loaded nature of the revenue outlook but after recent meeting with the management at the company's HQ, we came away with the opinion that the company feels confident about the 2H outlook," said Sarathy. "Further, revenue growth could accelerate next year along with margin expansion as mortgage origination volume stabilizes and expense growth moderates." When you couple that upbeat outlook with Ellie Mae's rock-solid balance sheet and still-reasonable forward P/E in the low 20s, it's tough to disagree with Dougherty's bullishness. 

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