Ellie Mae

So I bought a full position of Ellie Mae in September 2013 for $32. I sold approx. a third of my position at 60 and then again at 80 in October 2015 and May 2016. This was to raise funds for other stocks.
This is what I wrote in my notes in 2013:
ELLIE investing for long-term. Expect another drop hopefully after the next quarter then think about adding to position

That’s it. Rather brief. I remember they were suddenly investing massively in their services heavily that year so were expecting stagnant EPS growth. I think Saul used to be in this but got out around then for better opportunities rather than have it sit as dead money. And it was. It dropped to $22 in November and wouldn’t see 32 for almost a year since I first bought. But as predicted, it then took off (so why didn’t I take my own advice and buy more?!!)

Now it’s sitting at $113, with a P/E of 50 (and 1YPEG of 0.63) but a forward P/E of 60 using full year 2017 guidance (yeah that doesn’t look good does it? Will explain later).

So let’s revisit ELLI to consider whether to HOLD or SELL.

ELLI is a SaaS company that helps companies deal with mortgage applications. It currently handles about a 30% of applications in the US. They simplify this process which used to be massively time-consuming and complicated. Their Encompass solution automates a lot and also automatically updates for the latest regulations. It makes the whole process so much easier! It’s now cloud based, benefits from economies of scale, and benefits from the network effect. The more users who use it, the increasing likelihood of those not using it, will almost be forced to sign-up in order to compete in the business.

ELLI can be argued to be a category crusher. However, it is in a declining market. But despite these tailwinds, it has posted incredible growth.

The Numbers so Far
(bold is mid-range guidance)

	Q1	Q2	Q3	Q4		% change
Revenue (millions)						
2014	32.2	40	42.8	46.6	161.5	
2015	54.2	65.9	68.9	64.9	253.9	57%
2016	73.6	90.1	100.4	96.2	360.3	42%
2017	93				**435**	21%

Net Income						
2014	0.8	4.7	5	4.3	14.8	
2015	3.6	7.6	6.2	4.8	22.3	51%
2016	2.5	10.6	13.8	10.9	37.8	70%
2017	9.6	**16**			**52**	38%

EPS (non-GAAP)						
2014	0.16	0.32	0.29	0.38	1.15	
2015	0.33	0.48	0.45	0.44	1.69	47%
2016	0.34	0.64	0.72	0.57	2.28	35%
2017	0.25				**1.9**

TTM EPS					
2014				1.15	
2015	1.32	1.48	1.64	1.7	48%
2016	1.71	1.87	2.14	2.27	34%
2017	2.18					

Okay, so a few things here.

In March 2016, Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718…etcetc
This amendment to the accounting for income taxes became effective on January 1, 2017 and has been applied by Ellie Mae to its 2017 guidance
Adjusted net income consists of net income plus stock-based compensation expense, amortization of intangible assets as well as the income tax effects of the adjustments
Income tax effects of the adjustments is a new addition
The income tax effects are calculated based on the annual non-GAAP effective tax rate, which quantifies the tax effects of the non-GAAP adjustments.
This has effectively reduced net income
Q1 2016 would have a new value of 0.24.

So the accounting has changed, which makes it difficult to compare FY 2017 with previous years.
Therefore, I’ll focus on Net Income.

Guidance of 52 million implies growth of 38%. A big drop from the 70% the previous year. And yet, they killed it this quarter, 285% growth compared with last year, and their guidance for Q2 is 50% growth. However, ELLI isn’t too bad with their guidance so I guess we’ll have to go with the 38% growth.

SEATS retention is 96%
Total contracted users are 225,000 users.
Q1 new users were 12,100. The guidance is for 8000-1000 new users per quarter for the remainder of 2017.

In the last conference call, the CEO had this to say about growth:
As we’ve said, we think the target long-term growth rate right now is, how we’re driving the business, what we’re doing, how we’re thinking strategically and we’re actually in a cycle of our revising our five-year strategic plan, our target is to grow at 25%.

So their target is 25% over the next 5 years. At a P/E currently of 50, is that good enough?

They raised cash last summer and seem poised for an acquisition. Big growth will either come from having a big bank join them (unlikely, at least not anytime soon), are by going into other markets (e.g. cars?) - pure speculation and nothing solid.

I’ll leave you with two final quotes from the CEO regarding the mega banks and acquisitions.

Q1 2017 question regarding mega-banks or other lending platforms
Brian Schwartz - Oppenheimer & Co., Inc.

Jonathan, I want to build on kind of the commentary about the strength that you’re seeing in the enterprise and the bookings and the pipeline. We’re all sitting back here. We’re trying to understand better what the mega banks are thinking in terms of outsourcing the technology of the originations process to a platform supplier like Ellie Mae, because we know these mega banks, they are embraced in the cloud aggressively for cost savings.

So, on the mega banks clearly today, it’s not a target market for the business, but the question I want to ask you, is there anything that you’re doing either with the technology architecture or awareness in the market or anything that you’re seeing, you’re hearing today that could point to a good replacement cycle opportunity among those mega banks in the future at some point?

Jonathan H. Corr - Ellie Mae, Inc.

Yeah. Good question, Brian. It is one of those things where – these are long cycles and I would say and I kind of alluded to it earlier in one of my responses, I’m getting more and more optimistic about the long-term opportunity with some of these mega folks. And obviously, it’s not going to benefit us. So these are long cycles, we’re not going to see that benefit in 2017.

But as we look out beyond 2017, the things that we’re doing, the things that we’re doing with our open lending platform, the capabilities that we’re bringing to bear in terms of workflow automation, the things that we’re bringing to bear in some of our data and data science work, and the open APIs are really attracting the attention of some of the leadership at these key institutions.

So the conversations have definitely increased but these are long cycles and – you’re always hopeful, but it’s something that’s going to take a fair amount of time to make come to realization.


There is definitely opportunities out there. There’s activity we’ve been looking at things since we did the additional raise last summer. We have not found the ones that make sense yet. We were very disciplined. We’ve obviously done eight 8 to 10 over the years and it’s really about finding the right product, the right team at the right price. And all those have to come together to make it a success. And we want to be disciplined about what we’re doing in. We just haven’t found the right fit that fit all those criterion right now, but our expectations is we will do something or a number of things in the future and in a just matter of time.


ELLIE MAE, I believe, is a category crusher. It has solid, disciplined management, 30% of it’s TAM, and pretty much 0 competitors. I don’t believe it will be disrupted. It’s too boring! And there are tailwinds with its TAM. Unlike the big-data megatrend full of exciting and wonderful promises of things it can do, where there seems to be a new upstart and a new NBT every few months to disrupt the disrupters who were disrupting the incumbents, ELLI looks like a comparatively safe bet. However, at the moment, it looks to have gotten ahead of itself and seems too expensive. Growth rate has been fantastic over the last 3 years, but is now slowing down.

I’m still stuck as whether or not to sell. Selling has been discussed here recently quite a bit. ELLI has been good to me. But I believe holding will now make me lose out on opportunity costs. I’ve been thinking about it for the last few months, and yet it steadily marches up.


Great write up. I also bought ELLI back in 2013 around $26 after which it promptly dropped to $20 where I picked up some more. My last purchase was at $53 in March ’15. For how Saul invests, getting out when he did could very well have been the right decision as it was probably 18 months before the stock began take off. But I tend to have a longer time horizon than Saul, and I don’t mind a temporary loss in earnings (and a stagnant stock price) if the reason is for reinvestment to seize an opportunity as long as I believe in management and the potiential opportunity.

Hold or sell? I think either answer can be correct, but it depends on your investing style. I am holding because I believe there is still plenty of room for ELLI to grow, I believe in the product, and I believe in management. But as I said, I tend to look at least 5 years out into the future and I am not as good as predicting performance over the next 1-3 yrs. Saul is much better at that and his investing style reflects that approach. Whether or not ELLI is overvalued now, I believe there will be excellent returns over the long term.

Personally, I have not had great success constantly asking myself if there are better opportunities than what I am invested in. That may work well for the type of investing on this board, but for me it only encourages me to lose patience with stocks that are not successful in the short term when my investing thesis is based on a much longer time horizon. I will still sell stocks, but only based on my investing thesis, not based on trying to find the absolute best opportunity.


Excellent analysis, billyfreezr. Thanks. I own ELLI, too. Due to appreciation, it and SHOP are my second-largest holdings, after FB.

I just wanted to comment on one thing you said:

They raised cash last summer and seem poised for an acquisition. Big growth will either come from having a big bank join them (unlikely, at least not anytime soon), are by going into other markets (e.g. cars?) - pure speculation and nothing solid.

As I understand it, their next-generation platform, rolling out over the next year or so, will include the flexibility to support other types of lending. For instance, here’s an account of part of an ELLI presentation at the Needham analyst conference:

This comment gets me most excited. The Next-Gen platform will have optionality built in, meaning this new platform will not only work for mortgage lending, it will also work for other adjacent verticals such as consumer lending, car loan, student loan, etc. Basically, it is for all things lending. Think about it, how huge the TAM will be for ELLI, if it works and gets wide adoption (mortgage lending alone, the management think the TAM is 6.25B for the company, at the end of 2016Q3, the ttm revenue is ~330M).

Just FYI, and thanks again.



I believe in this company. I’m holding.

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Back in 2013 Saul I believe got out of ELLI because he saw a temporary lack of growth (i.e. they said they were going to reinvest a lot of profit), and has the temperament and skill to find better opportunities rather than sit around with dead money for 12 months.
I don’t have that skill. I see a company that will be great, I’ll stick with it.

The stock price took a hit because suddenly their EPS growth declined, despite revenue going up. There was a clear reason for this, but I guess the market does not like the unpredictability of 1-off negative hits. If you’re an Amazon or Shopify, you can forever not make any profits, as long as your revenue keeps shooting up, and the market will reward you. It’s all about consistency!

Now is 2017 different from 2013/14?
They’ve got lots of cash on hand for reinvestment. Like 2013, there is the Next-Gen platform around the corner that promises a lot. But atm that’s just speculation. What’s the TAM of these adjacent verticals? And I’m sure they’re not as complicated as Mortgages - so is there really growth to be had? I don’t know, curious!

And what about their current TAM? Their revenue and income growth is slowing rapidly.
Current Stock Price: 113
P/E: 50
1YPEG: 0.6
Forward P/E: 60

They’re hoping for growth of 25% over the next 5 years.
If they stick to that, after 5 years, at the current stock price, the P/E will be roughly 18, I think.

Is that something worth holding on to?
I do like the company, and it’s one of my safe ones I believe, but it just looks overpriced to me. The growth phase we’ve seen the last 3 years looks over.