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The best-performing IPO of a U.S. technology company since the financial crisis doesn’t make electric cars or run a social network—it sells mortgage software, but it has taken a tumble in the aftermath of the U.S. election.
Ellie Mae Inc.’s shares have gained 1,271% since an initial public offering in 2011, outpacing the likes of Tesla Motors Inc., Facebook Inc. and LinkedIn Corp. among U.S. listings. Its customers are the small mortgage lenders that have surged in the past five years thanks to low interest rates and big banks’ pullback from the housing market.
But with the election victory of Donald Trump and a Republican sweep of both houses of Congress, that period may be coming to an end—along with Ellie’s days as a highflying stock. Mortgage rates have started rising, and investors are betting that big banks may soon be unshackled from some of the most onerous regulations and poised to recapture market share for mortgages. Ellie Mae’s shares have dropped 23% since the election, while bank stocks and broader stock-market benchmarks have rallied.
The Pleasanton, Calif., company was founded in 1997 by Sig Anderman and Limin Hu. It attracted investment from venture-capital funds and mortgage-industry giants including Fannie Mae. (Unlike other “Mae” firms, Ellie Mae has no relationship to the U.S. government. The name is a shortening of “Electronic Mortgage Affiliates.”)
The company’s software automates the mortgage process by helping a lender collect and compile appraisals, titles, income history and other documents. Customers pay monthly subscription fees of about $75 per user, plus additional fees for loans beyond a certain volume or other services and data.
That software plus the resurgence of independent mortgage companies and a new boom in home lending, sparked by historically low rates, lifted Ellie Mae’s business and stock.
“It was the perfect trifecta to drive growth,” said Saket Kalia, an analyst at Barclays PLC.
The stock is now reacting to the rise in 10-year U.S. Treasury yields since Election Day, Mr. Kalia said. “One part of the story has arguably changed,” he said. But he also cautioned that new home purchases weren’t as rate sensitive as refinances.
Like its customers, Ellie Mae was hit hard by the collapse of the housing market in 2008. Its founders slashed costs dramatically, but then filed to go public in 2010 as it sought to raise capital to expand a new software business focused on lenders, rather than brokers.
At the time, few new investors were willing to bet much on a housing recovery. The IPO priced at $6 a share, despite aiming to sell for as much as $11. That left its initial market value below $150 million, requiring it to switch its listing from the New York Stock Exchange’s big board to the junior market.
Ellie Mae’s shares started rising in 2012, allowing the company to move up to the NYSE big board. The company quickly gained dominance among the many small nonbank lenders. Ellie Mae’s stock closed Friday at $82.26, and its market value now stands at $2.76 billion.
Nonbank lenders account for more than half of all home loans, up from less than 10% in 2009, according to Inside Mortgage Finance. The majority of them are small players, which are more likely to outsource technology.
Now, however, events may be moving against Ellie Mae, with rising rates depressing mortgage-refinancing volumes, and the potential loosening of some new rules that have forced many small firms to upgrade their processes.
“The election results are great for the old-line phone and fax originators,” said Vishal Garg, founder of online mortgage firm Better Mortgage Inc. “But it doesn’t change the fact that [consumers] want something different from a mortgage company.”
Before the election, Ellie Mae had already been forecasting higher mortgage rates that could cut refinancing volume even as home purchases increased, said Chief Executive Jonathan Corr.
Under looser regulations, Mr. Corr said, there would still be market pressure to adopt stringent lending guidelines that software is needed to manage. And banks might buy more mortgages from smaller lenders who are Ellie Mae customers rather than make more loans on their own.
“We’re still going through a secular change to embracing automation,” Mr. Corr said. “We can still grow 25% a year for the foreseeable future.”
Write to Telis Demos at telis.demos@wsj.com
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