Ellie Mae (ELLI) to See Mortgage Improvement, Barclays Says in Upgrade

Shares of Ellie Mae Inc. (NYSE: ELLI) gained 5.2% Tuesday after Barclays upgraded the stock to Overweight and raised the price target by %14 to $114.00 (from $100.00) based on multi-year mortgage improvement and better margins.

Barclays predicts Ellie Mae can see 6% mortgage volume acceleration in FY18 and a 12% in FY19, driven by a smaller refinance headwind and larger and growing purchase market. This, combined with continued share gain, can drive at least two years of accelerating volume for ELLI, despite an overall down mortgage market in FY18 and flat FY19.

Analyst Saket Kalia is leaving FY18 and FY19 revenue estimates unchanged but has more conviction in them based on the potential for accelerating volume growth. Kalia also has more conviction in the estimates because she thinks the recently acquired Velocity asset is bigger than originally modeled.

A differentiator in Barclays' analysis is that they think FY 19 EBITDA can be higher based on target margins of 35-40% in "core" ELLI and 15% margin in Velocity in FY19. The 15% may sound high, but given the overlap in customer base, Kalia estimates expense synergies only need to be ~10% to reach this margin and bring ELLI back to 30%+ overall margins in FY19.

The new price target is based on 19X Barclays revised FY19 EBITDA of $192 million.

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