Why Ellie Mae Inc. Shares Slumped Today

Does this analyst make a good case? Or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 11, 2014 at 2:12PM
Technology and Telecom

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 analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Ellie Mae (NYSE:ELLI) sank 5% on Friday after FBR Capital downgraded the mortgage industry software technologist from outperform to market perform.

So what: Along with the downgrade, analyst Samad Samana lowered his price target to $29 (from $37), representing about 14% worth of upside to yesterday's close. So while contrarians might be attracted to Ellie Mae's price weakness in recent weeks, Samana's call could reflect a sense on Wall Street that the company's risks still aren't fully discounted in the valuation.

Now what: FBR lowered its 2014 origination volume estimate for Ellie from $1.297 trillion to $1.099 trillion. "This reflects a 40% decline in 2014 from 2013, which is materially worse than market expectations when ELLI provided its 2014 outlook," said Samana. "Our analysis using these updated estimates suggests the company's guidance and the Street consensus for ELLI are likely to be reduced for 2014 and 2015." Of course, with Ellie shares now off about 30% from their 52-week highs and trading at a PEG ratio of 1, that downbeat view might provide patient Fools with a solid long-term growth opportunity.