Marketo (MKTO) Has 50% Upside in Buyout or Through Organic Growth - Bernstein

(Updated - April 13, 2016 3:32 PM EDT)

Marketo (NASDAQ: MKTO) is gaining Wednesday (+1.6%) following positive comments from Bernstein analyst Mark Moerdler, highlighting the company as an attractive takeover target. Moerdler sees 50% upside in a takeout or through growth.

"We believe Marketo, even after its recent move, remains the most undervalued company in our coverage and expect the stock to appreciate >50% over the next year," Moerdler said.

The analyst sees two potential scenarios for this to happen, both of which we think are reasonably likely:

• Continue as stand-alone pure play with moderate to strong subscription growth
• Strategic Acquisition

Commenting on why the stock hasn't worked recently, the analyst said it is a widely misunderstood and underestimated company. The stock is down fear of competitive threats from larger players. This was exacerbated by growth stocks falling out of favor in the early part of the year.

Looking at the company as a stand-alone pure play, the analyst said the company "has consistently been a thought leader and consistent innovator in Digital Marketing and has steadily moved up and to the right in many industry rankings." He highlights that Gartner ranks Marketo as being on par with Oracle in the "Leaders' Quadrant" for Lead Management, with no other SaaS peers even coming close. The company has been improving their sales and marketing efficiency, the analyst notes. In addition, digital Marketing vendors at industry events have further confirmed Marketo's increasing success in the enterprise.

"Even using conservative expectations of modest deceleration in subscription revenue, and no growth in services, and a muted 4x EV/Sales multiple, we believe the stock should appreciate to $32 over the next 12 months," the analyst said

On the strategic acquisition side, Moerdler notes that cients have been asking them about recent market reports of potential M&A activity regarding Marketo which has helped the stock to appreciate ~43% from its February lows. "Given that Digital Marketing is one of the most attractive SaaS markets with the largest untapped opportunity1 , we would not be surprised to see a global software, internet, or media company acquire Marketo," he said.

In the event of an acquisition, the would expect a forward EV/ revenue multiple of 5x, at a minimum. This represents a 64% premium to the stock's current multiple and implies an acquisition price per share of roughly $34.

SAP (NYSE: SAP), Adobe (NASDAQ: ADBE), and Microsoft (NASDAQ: MSFT) are on the short list of a likely potential acquirer, the analyst said.

The firm reiterated their Outperform rating and $32 price target on the stock.

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