Little-Known Software Company Just $1 Away From a Breakout

According to Forrester Research, it’s the “age of the customer,” which is why the buzz phrase “customer experience” is front and center for companies across industries.

Research by Emmett and Mark Murphy, authors of “Leading on the Edge of Chaos,” shows companies can increase profitability by 25% to 125% by simply reducing their customer defection rate 5%.

And according to a Customers 2020 Report, customer experience will be a more important differentiating factor than price or product over the next five years.

One particularly interesting area of customer experience is called “engagement marketing,” which entails directly involving customers in building a brand. Through social media and smartphone apps, customers can provide immediate input into a brand’s direction. In response, companies can better cater to customers’ needs, and as the theory goes, generate higher sales.

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That’s where engagement marketing company Marketo (NASDAQ: MKTO) comes in.

The company, which was founded in 2007, specializes in providing cloud-based engagement marketing software. This software enables online marketers to measure and improve the effectiveness of their customer interactions.

Marketo boasts strong revenue growth and a stock on the brink of a bullish breakout.

Despite double-digit sales growth, Marketo is not yet profitable. However, the company’s recently reported third-quarter results were promising. Revenue increased 40% to $54.9 million, topping analyst expectations. Meanwhile, the company posted a net loss of just $0.12 versus estimates for an $0.18 loss.

Management also issued upbeat guidance for the fourth quarter and full year. In the fourth quarter, they expect revenue will be in the range of $57.5 million to $58.5 million — a more than 35% increase from the year-ago figure.

Management expects full-year sales of between $209 million and $210 million — up about 40%. And for 2016, analysts project revenue will expand another 32% to $277.4 million.

While Marketo is not expected to turn a profit during this time, it is taking steps in the right direction. The company is on a roll with regards to striking strategic partnerships. In the past month, the company announced plans to partner with three firms: 

— Nexmo, a privately held cloud-based text messaging platform; 
— Boomtrain, a privately held customer personalization marketing platform; and
— Perk.com, a Canadian-traded cloud-based mobile rewards platform. 

These partnerships should continue to increase Marketo’s reach and brand awareness.

The company also offers potential as a takeover candidate. Over the past five years, several big names have gobbled up smaller engagement marketing firms. 

For example, Salesforce.com (NYSE: CRM) acquired cloud marketing platform ExactTarget. Oracle (NASDAQ: ORCL) dished out $1.5 billion to acquire Responsys just a year after spending $81 million to buy marketing automation company Eloqua. And IBM (NYSE: IBM) acquired Silverpop, a cloud-based digital marketing system. 

We would never buy a stock solely based on takeover speculation, but it is a factor that could potentially send the share price rocketing higher.

Turning to the chart, MKTO is very close to breaking out of a major downtrend and bullishly resolving a symmetrical triangle pattern.

MKTO

The triangle is formed by the major downtrend line, which began in February 2014, when the stock peaked at $45.  

Following this high, shares declined sharply, falling to a low of $22 in June 2014, rallying to the $35 range by late January2015, and then trading as low as $23 in July of this year. MKTO then rallied to around $34 in October on better-than-expected second-quarter results before falling back to about $27. 

An uptrend line can be drawn off the July low near $23. This forms the bottom line of the symmetrical triangle.  

The downtrend line currently intersects the chart near $30.50 — just about $1 above the current price. If shares can break above this level, there will be some resistance at the October high near $34, but the stock should still be able to move significantly higher.

According to the measuring principle for a triangle, calculated by adding the height of the pattern to the breakout level, shares could reach a new high of $39.09 ($32 – $23.17 = $8.83; $8.83 + $30.26 = $39.09). 

Given the strong revenue outlook and takeover potential, we plan to go long on Marketo. To minimize risk and maximize reward, we suggest waiting till the stock pierces resistance marked by the downtrend line.

Recommended Trade Setup:

— Buy MKTO at or above $30.51
— Set stop-loss at $27.29
— Set price target at $39.09 for a potential 28% gain by Q3 2016

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