An Inexpensive Internet Real Estate Company Growing over 100% Year over Year
Saul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recently posted a blog on why I decided not to buy Zillow (NASDAQ: Z). Unfortunately I was shooting down an internet stock that was many peoples’ hope for an exciting investment in the real estate market. I therefore think that I should give an alternative to those who want to invest in a real estate internet stock.
Well, here’s a real estate internet stock that for the last couple of quarters has been growing at least as fast as Zillow (over 100% year over year), and that has a trailing PE ratio in the 30's, instead of a trailing PE which is well over 100 like Zillow’s. By the way, it’s a stock that you probably have never even heard of, which makes it even more of a find!
The company is Elli Mae (NYSE: ELLI). It provides enterprise level on-demand software solutions for the mortgage origination industry. Their Encompass360 provides an end-to-end solution using a SaaS (software as a service) model. In addition, the company sponsors the Ellie Mae Network. The Network allows mortgage professionals to conduct business transactions with mortgage lenders and settlement service providers electronically in order to process and fund loans. The mortgage origination business used to be very paperwork-intensive before Ellie Mae came along, so signing up with them seems to be a no-brainer for most of their customers.
While 50% or so of mortgages in the United States pass through the large mega-banks, the other 50% is wide open to Ellie Mae. Currently about 20% of all mortgages that originate in the United States pass through Ellie Mae's systems. And once a customer is signed up, Elli Mae can sell them more and more services.
You must be wondering why Zillow’s stock is so expensive and Ellie Mae’s is so cheap. It’s the same reason that Zillow’s has all the hoopla and that you have never heard of Ellie Mae.
That reason is that Zillow, just like Yahoo! (NASDAQ: YHOO) Real Estate (which Zillow has a cooperative agreement with), is available to the general public. Lots of people check Zillow or Yahoo Real Estate every day to see if the price of their house has changed, or what their neighbor’s house is selling for.
On the other hand, Ellie Mae, although it’s also an internet company, is used exclusively by people in the real estate business. Everyone in the mortgage business has undoubtedly heard of Elli Mae. However, while nearly everyone in the general public has heard of Yahoo!, and a large part of them have heard of Zillow, very few people outside the mortgage industry know about Ellie Mae.
This is the same reason, or at least one of them, that Amazon.com (NASDAQ: AMZN) has a huge PE ratio compared to its growth rate, while on the other hand the publishing companies that print the books that Amazon.com sells have low PE’s. A huge number of people buy books from Amazon.com or have a relative or friend who does, but probably not more than 2% of them could tell you who is the publisher of the book that they are reading. Amazon.com deals with the consumer, while publishing houses sell to wholesalers.
That gives you a big advantage when you buy Ellie Mae instead of Zillow: You’re not paying a high price for all that publicity!
Here are the results from Ellie Mae’s June quarter:
Ellie Mae’s revenues were up 104% to $23.5 million from $11.5 million, and up sequentially from $20.9 million. This compares very well with Zillow. Note that Ellie Mae is doing this in a very depressed housing market. You can imagine what will happen if the housing market starts returning to normal levels.
Adjusted net income was $6.3 million, up from $0.5 million.
Adjusted earnings were 27 cents, up from 2 cents (!), and up sequentially from 20 cents. This is incredibly strong and shows that once their fixed costs were covered they had a lot of leverage in their margins.
Total users increased 23% from the year before.
Revenue per user increased 69%. Yes, you read that right, 69%!!! This means they’re extremely successful at up-selling new services to their existing customers.
SaaS-model Encompass revenue was up 191% and is now 45% of total revenue. They are trying to convert all their customers over to the SaaS model.
On-demand revenue was up 112% and is now 87% of total revenue. Rather than having the client pay a yearly fee, Ellie Mae is converting their clients to an on-demand model. Aside from a small connection fee, clients only pay when they use the system. The clients like it because they aren’t risking that yearly fee, and Ellie Mae likes it because they make more money, especially when originations go up.
Ellie Mae generated cash of $3.9 million in the quarter.
Outlook: They raised all their estimates (margins, revenue, earnings). The midpoint of their estimate for the September quarter adjusted earnings is 19 cents, which is up over 100% from last year's 9 cents. Keep in mind though that this quarter they estimated 16 cents and came through with 27 cents.
My conclusions: I feel that these are incredibly good results. And as far as I can see there is nothing but more good news ahead.
To help you do your own investigation, here's a link to Ellie Mae’s June quarter results:
And another to their website which has a recording of the conference call and an investor presentation.
I have long positions in Elli Mae and AMZN. I have no positions in Zillow or Yahoo. The Motley Fool owns shares of Amazon.com and Zillow. Motley Fool newsletter services recommend Amazon.com, Yahoo!, and Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.