What about growth?
Marketo has never had a profitable quarter, and the second quarter was not an exception. The company finished the quarter with a $0.49 loss per share, missing analysts’ estimates. Revenue was up 62% year-over-year and up 14% sequentially.
The company’s loss totaled $9.6 million on a non-GAAP basis and $12.4 million on a GAAP basis. The difference came from $2.6 million of stock-based compensation. This is a very high number, given the company’s performance. However, this is typical for cloud companies.
Marketo expects to finish the third quarter with $23 million – $24 million in revenue. This would be a sequential growth of 2.2% – 6.7%. Not the type of growth you expect from a company that manages to lose $12.4 million on $22.5 million of revenue.
Is it enough?
The main risk for Marketo is that the company could find itself in no man’s land with no financial performance and no big company bidding for it. In this case, investors would focus on earnings power and dump the stock.
This is the story of Vocus, Inc. (NASDAQ:VOCS), a marketing cloud company. The company recently reported that revenue rose 5% year-over-year and just 1% sequentially. No wonder the stock is down 40% this year. The company is trying to find its place among the competitors.
The recent move was to raise prices and push Vocus, Inc. (NASDAQ:VOCS) into the high end of the market. The average selling price for new customers increased by 45% in the second quarter. The increase in price was offset by the drop in units sold, which resulted in very slow revenue growth.
Marketing cloud is growing healthily at Adobe Systems Incorporated (NASDAQ:ADBE). This segment posted 18% revenue growth and 25% bookings growth last quarter. Adobe Systems Incorporated (NASDAQ:ADBE) has already made its marketing cloud purchase, and it is unlikely it would need more. The company is delivering healthy results, with the growth in both marketing cloud and Creative Cloud. Following Microsoft, Adobe decided to push its products to a subscription model.
In addition, Adobe Systems Incorporated (NASDAQ:ADBE) offers synergy that other companies don’t. An Adobe Systems Incorporated (NASDAQ:ADBE)’s user could develop the marketing product with the help of the Creative Suite, and push it into the market with Marketing Cloud. This is a unique advantage nobody else has.
Marketo gets a huge part of its revenue from Salesforce’s customer base. Now, that Salesforce has ExactTarget, this gets more complicated. During the earnings call, Marketo has stated that it is working on diminishing the impact of its Salesforce relationship. However, as potential acquirers turn into powerful competitors, the clock is ticking for Marketo.
The company had $121.9 million of cash on hand, and this cash gives it time to grow. The company needs to improve its margins if it does not want to ruin the balance sheet while growing. There were some bright points on this front in the second quarter. For example, professional services gross margin improved to negative 13% from negative 16% last quarter. There is still a long way to go.
Bottom Line
I do not think that Marketo will be able to grow and deliver profits to support its valuation. Investors cheered the quarterly results, sending the stock almost 50% higher than its IPO price. In my opinion, this is overoptimistic. If the company is not acquired, the stock’s prospects are bleak. The list of potential bidders has narrowed significantly, and I think this should worry investors.
The market will be taken by big players like Adobe Systems Incorporated (NASDAQ:ADBE), whose prospects look very promising. Adobe trades at a relatively high 27.55 forward P/E, so an investor might be better served to wait for a pullback before jumping in. The hope of Vocus, Inc. (NASDAQ:VOCS) being bought is probably still alive. Investors focus on results, and these results are bleak. I expect more downside for this company and its stock.
The article Be Careful With This Tech Stock originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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