The Great American Dream has always included a car, a happy family, a dog or a cat and a great lifestyle. But at the centre of all of this dream, the family home has always been the key element.
Home buying in the United States has always been a traditional transaction. In the early days of home building, communities would trade skills and expertise to build new homes.
The modern housing market was shaped by the emergence of local banks and lenders who advanced a substantial amount of money to home buyers and builders. In exchange, the home buyer would agree to pay a defined amount of interest on the loan amount for as long as it took to repay the loan.
The repayments were required to be regular and consistent, and interest rates could vary depending on market conditions and other contract terms. After a while, banks began to compete on interest rates to attract more customers, resulting in low interest and no interest loans, and other innovative products.
With literally thousands of lenders and options, technology can go a long way to simplifying the options for home buyers and lenders. This trend and a stronger housing market have seen the stock price of Ellie Mae Inc (ELLI) increase from levels around $28 last year to recent highs above $65.
So can Ellie Mae continue to build on this recent strength and reward options trading services and investors in the future?
Understanding the Business
Ellie Mae Inc (ELLI) has a complex range of businesses and services that all work towards one solution: making it simpler and safer to get a mortgage. For lenders who give home buyers the money they need for a new home, Ellie Mae offers a range of services.
One of the most comprehensive services is a product called Encompass. Encompass is a mortgage management solution that allows records and documents to be managed and stored efficiently and securely. Creating a new mortgage is a lot like having a very complex business contract between two parties. This means that there are literally dozens of steps, from legal compliance, to financial approvals, credit checks and local government registrations.
Encompass offers investors, lenders and other service providers to the mortgage industry a “one stop shop” place to come to manage these many documents and steps.
Encompass CRM is a customer relationship management solution that builds on this capability and allows lenders to interact with their customers better, which increases client satisfaction and ultimately, sales and profits.
The company was founded less than twenty years ago, and has benefited from the immense advantages that the internet provides in relation to document transfers and storage, especially where speed and security is concerned.
Metrics and Measures
The most recent financial results of Ellie Mae Inc (ELLI) showed that this focus on providing a low cost, efficient solution for a huge industry was starting to pay off.
Revenue for the quarter hit a record for the company, with $54.2 million, which was 68% higher than the same quarter in 2014. Another highly pleasing result for the company was the average revenue per user of their flagship Encompass product. Average revenue per user rose to $474, which was well ahead of the $343 in the previous corresponding quarter.
This substantial spike shows investors and options trading services that Ellie Mae is continually improving their product over time, and as a result, users are willing to pay more for it, and that new users are signing up.
As a result of this positive feedback and momentum, management were able to upgrade their guidance for the next quarter, with revenue up to $60 million projected, which would be another record for the company. For the full year, revenue is expected to be between $223 and $226 million, which is a 10% increase on previous forecasts.
The Investment Case
The investment case for Ellie Mae (ELLI) is highly compelling. The reason is that the company offers the possibility of managing a very complex transaction in a much more efficient and simple way than has previously been the case. That simplicity and effectiveness is why user numbers and revenues have grown ahead of forecasts in the recent quarters.
If the company can continue their research efforts and improve their product, user satisfaction should grow, and they will continue to sign new customers from banks and other lenders to their product. Management also needs to be aware of the needs of their existing user base, and listen to feedback to improve the user experience for them. Xero, a cloud-based small business accounting firm that has partnered with Accel Partners (the original investors in Facebook) is a market leader in this kind of innovation. They continually improve their product based on user feedback, and win new customers while keeping existing ones happy as a result, and Ellie Mae could do the same with their products for the mortgage industry.
Ellie Mae (ELLI) is an interesting business prospect that has the potential to offer thousands of customers a way to make their lives and businesses simpler. If they can continually refine and improve their products, customers will stay loyal, and they will continue to grow their recurring revenues and profits.
To find out about the right time to buy rapidly growing stocks like Ellie Mae and others, it pays to have a subscription to a regular, high quality options trading newsletter like Financial Markets Wizard.