What happened

Shares of Ellie Mae (NYSE:ELLI) plummeted 30.1% last month, according to data provided by S&P Global Market Intelligence, after the mortgage software provider reported revenue and guidance that fell short of Wall Street's expectations.

So what

Ellie Mae's adjusted (non-GAAP) net income climbed 22% to $24.2 million, or $0.67 per share. That bested the average analyst estimate for earnings per share of $0.54.

A man and a woman rejecting a mortgage offer.

As rising mortgage rates increase costs for would-be homeowners, Ellie Mae's transaction-based revenue is coming under pressure. Image source: Getty Images.

Revenue, however, fell short of consensus estimates. Sales rose 15% to $123 million. Wall Street had expected revenue to increase by 20%. 

Worse still, CEO Jonathan Corr said that Ellie Mae would be unable to achieve its full-year financial targets. 

Rising rates, low housing inventory, and overall home affordability are serving as significant headwinds to the overall mortgage market. While we believe these headwinds are temporary, they are prompting us to reset our assumptions for the year.

In turn, Ellie Mae reduced its guidance. The company now expects: 

  • Full-year revenue of $477 million to $480 million, down from a prior forecast of $495 million to $505 million
  • Non-GAAP adjusted net income of $65.8 million to $67.6 million, compared to $64.5 million to $69.5 million
  • Non-GAAP adjusted EPS of $1.84 to $1.88, versus $1.79 to $1.92 

Now what

Despite Ellie Mae's short-term troubles, its long-term outlook remains bright. The company's software helps to streamline and automate the mortgage-origination process -- a largely inefficient and high-cost area that's ripe for disruption.

And as the industry leader, Ellie Mae benefits from network effects; it currently works with more than 2,300 lenders and 240,000 end users. Better still, high switching costs help to lock in customers; once a lender adopts Ellie Mae's software, it can be expensive and time consuming to switch to a rival platform.

All told, Ellie Mae remains well positioned to profit from the long-term growth of the mortgage market. As such, investors may wish to view the stock's October swoon as a buying opportunity.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ellie Mae. The Motley Fool has a disclosure policy.