Magazine article Mortgage Banking

Will IPO Fever Spread to Mortgage Tech?

Magazine article Mortgage Banking

Will IPO Fever Spread to Mortgage Tech?

Article excerpt

Facebook, Menlo Park, California, has filed for an initial public offering (IPO), and the chatter is that it'll make 1,000 millionaires. It's all the buzz in Silicon Valley (where I live). Perhaps the most excited are the Realtors [R], as they expect a big surge in high-end home sales. Can we expect some of that excitement to trickle into our industry?

We can look at Pleasanton, California-based Ellie Mae Inc. as the most recent IPO, and it is trading in the $5-$6 range. That's right at its IPO price of $6. From my viewpoint, that's about fair value.

It certainly isn't the valuation that we are seeing with some social media IPOs such as Zynga Inc., San Francisco (current market cap of about $10 billion). With a price-to-sales ratio (P/S) of 8.45 and a price-to-earnings ratio (P/E) of 180 (as of this writing), such numbers are reminiscent of the dot-com boom of yesteryear.

Ellie Mae has a down-to-earth P/S ratio of 1.83, but with a P/E of 139 it could be considered in the same camp as Zynga. I believe that, in general, Walt Street expects traditional valuations for mortgage technology companies in the public markets. I don't believe we can expect the valuations of social media companies like Facebook and Zynga to trickle down to our mortgage technology firms. Their valuations, while high by traditional standards, are being proven out in terms of their high growth rates.

In the private market, the valuations are widespread. Most of the firms I follow have valuations that are in the realm of what we see with Ellie Mae. One to two times sales is fairly normal. The P/E ratios tend to be 6 to 8 on average, but have a wide variation. In fact, I have seen sales where profits are non-existent and yet the P/S is north of 2. These types of deals are strategic in nature, meaning the value of the firm is more than its intrinsic investment value or return on investment (ROl).

Recently, we saw Ellie Mae spend its IPO-raised cash on a firm called Del Mar Datatrac Inc., San Diego, for about $25 million. It's clear that Ellie Mae saw this as a strategic acquisition, as the P/E and P/S ratios are rumored to be very high. In the related press release, Ellie Mae increases its revenue guidance post-close by only $2 million per year. Clearly, Ellie Mae expects it can obtain a strong ROI with its $25 million investment. Revenues will have to increase substantially from this acquisition to justify this price. The company likely will see a lot of cross-selling opportunities.

What can be so difficult to predict is when the game changes and suddenly red-hot companies disappear.

We've all seen this a number of times, with public tech companies such as Netscape Communications (the firm produced the first browser and was displaced by Microsoft [R] Corporation), and then, of course, there was Atari Corporation (showing that such downfalls go way back in the annals of technology history).

Yet our ability to predict this remains an enigma. Some, including myself have a similar prognosis for Chicago-based Groupon. Even if it is a success, there isn't any questioning the future holds many more failures.

Our own markets have a long list of firms with similar fates. Those with a history in our industry might remember firms like iOwn, nCommand, Xpede, Pedestal Inc., eCloser, OnePipeline, Ultraprise Corporation, HomeAdvisor, Framework Inc. …

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