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Morningstar | Adobe Reports a Solid 3Q; Raising FVE to $245; Rumor of Marketo Acquisition Overshadows Earnings

Adobe reported solid third-quarter fiscal 2018 results, and we are raising our fair value estimate to $245 from $235 as we account for guidance and increased assumptions around margin expansion. The firm delivered revenue of $2.29 billion, representing 24% year-over-year growth. Adobe’s segments continued to fire on all cylinders, with digital media reporting $1.61 billion in revenue and digital experience reporting $614 million. The firm repurchased $750 million in stock for the quarter, as part of the $2.5 billion repurchase program announced in January 2017. We anticipate strong growth for Adobe, but with shares trading above our fair value estimate, we would wait for a pullback before entering this name.

The big news today was not around the quarter, but a report that Adobe is potentially in talks to acquire Marketo. For reference, back in May, Adobe agreed to acquire Magento for $1.68 billion, which we believe will enable Adobe to bolster its business-to-business, or B2B, and business-to-consumer, or B2C, commerce capabilities. We anticipate that the Magento acquisition will allow Adobe to better compete with Salesforce, SAP, and Oracle, which have all entered the commerce market through acquisitions.

In terms of Marketo, the marketing software player went public in 2013, before being acquired by Vista Equity Partners for $1.79 billion. We note that Vista’s playbook is to acquire high-growth, mission-critical enterprise software firm and improve its operations. Visibility into Marketo’s financials are limited, but its last 10-K indicated that it did $209 million on the top line in 2015. Assuming Marketo's financials have improved since the buyout, we would expect a multi-billion-dollar purchase price, with Adobe’s $4.9 billion in cash and short-term investments more than enough to fulfill the deal. Overall, if a Marketo acquisition comes to fruition, we see it as evidence of Adobe’s desire to compete more aggressively in its digital experience segment.

According to Gartner, Marketo has durable B2B marketing capabilities, with lead management, inbound marketing, social marketing, and event management. The firm has been focused on expanding its B2C offerings. Gartner notes that Marketo is a leader in CRM lead management, a piece of the total CRM pie in which Adobe does not currently compete. Lead management is essentially the ability to attract potential buyers and deliver those prospects to an enterprise’s sales team. Marketo’s email marketing software allows enterprises to tailor their marketing message to specific customers through built profiles. A potential buyout would make Adobe a clear leader in the B2B marketing automation business.

Overall, the rumored Marketo tie-up would make Adobe an even stronger competitor in the multichannel marketing hub space, solidifying its lead against Salesforce.com, Oracle, SAP, and IBM. Additionally, an acquisition of Marketo in the same year as Magento would help Adobe gain exposure to other areas of CRM, namely lead management, making it an even more viable threat to these rivals.

For more information on Adobe, please see our February Technology Observer, “You Call Yourself a Salesman? Not Without a Wide-Moat Marketing Cloud: Adobe and Salesforce Poised for Marketing Dominance.”