Disclosure: I am long ELLI.
We recently argued that the emerging bear case for Ellie Mae (ELLI) was way overdone. This bear case seemed to have been produced by a report from analyst house William Blair, arguing that the company would not be able to sustain its conversion rate in users of self-hosted software (mainly Encompass) to Ellie Mae hosted software as a service (SAAS).
Another element of the bear thesis (or Blair thesis, if one wishes) is that for this year, there is a good deal of headwind in the mortgage origination numbers. That might be somewhat surprising when we hear soundbites about a recovery in the housing market, but it isn't as it's based on prognostications from Freddie Mac (FMCC.OB), Fannie Mae (FNMA.OB) and the Mortgage Bankers Association.
These organizations produce monthly forecasts and assume the fall in the number of refinancing existing mortgages will trump the number of new mortgages by some considerable number, the latest forecast is a 17% decline in overall origination.
We argued in the earlier article that these predictions are old news, so we could not fathom why this would cause a sudden 30%+ drop in the Ellie Mae share price in less than two weeks. That should have been in the price for some time, as we pointed out that in the Q3 conference call, the company itself assumed a 20% headwind in the market for this year. Even then it expected a 25% revenue increase in 2013 over 2012. [Read on here]