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Okta: Low Bar And Fixable Problems Bode Well For The Stock

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OKTA office successful SOMA district, San Francisco

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The marketplace has precocious been rewarding erstwhile high-growth companies that person reset their expectations overmuch little erstwhile they jump complete these debased bars. Okta (NASDAQ:OKTA) looks for illustration awesome near-term opportunity if this inclination continues.

Company Profile

OKTA is a package institution that allows clients to authenticate and head personification identifications for apps and services crossed aggregate devices. Their offering is compatible pinch nationalist clouds, on-premises infrastructures, and hybrid clouds. OKTA uses a software-as-a-service (SaaS) business exemplary wherever it chiefly generates gross done nan waste of multi-year subscriptions to its offerings.

The institution waste 2 chiefly solutions. The Workforce Identity Cloud is utilized by customers to unafraid their workforce and to beryllium capable to create unafraid solutions to collaborate pinch partner networks. The offering has aggregate modules, which are priced from $2 per period per personification for SSO azygous sign-on up to $11 per period per personification for personality governance pinch unlimited flows. It besides has an precocious sever entree solution for $15 per server per month. Its Workforce Identity Cloud offerings and pricing tin beryllium found here.

OKTA's Customer Identity Cloud, meanwhile, is utilized by companies to supply unafraid experiences for their customers aliases extremity users. The patient offers 3 plans, including an Enterprise Offering, B2C Plan, and a B2B. This offering comes from OKTA's acquisition of Auth0, which it acquired for $6.5 cardinal successful May of 2021. Pricing and scheme item tin beryllium found here.

The acquisition of Auth0 was done to thief OKTA go a one-stop shop successful nan recognition information market. Talking to TechCrunch successful November, CEO Todd McKinnon said:

"We bought them to change, and we bought them because we needed alteration to triumph this customer personality market. Our strategy is that we person to triumph some nan workforce marketplace and nan customer personality market. And nan only measurement we're going to move personality into 1 of these astir important platforms for each institution is we person to [own] some usage cases."

Opportunities

Cybersecurity and ways for companies to protect their information and their customers' information is 1 of nan astir important issues facing enterprises large and small. Making judge a personification is who they declare to beryllium is 1 measurement successful this process, and nan marketplace that OKTA is attacking. Identity is simply a ample market, which OKTA puts astatine a TAM of $80 cardinal - $50 cardinal for workforce personality solutions and $30 cardinal for customer facing personality solutions.

TAM

Company Presentation

Meanwhile, nan secular trends towards nan continued activity to nan cloud, much cloud-based apps, and much infrastructure going to nan cloud, arsenic good arsenic distant work, each play into companies needing to cognize who has entree to their networks. It's a increasing marketplace and nan proliferation of much devices and cloud-based apps only fuels nan industry's growth. Gartner has predicted that cloud-native platforms will service arsenic nan instauration for much than 95% of caller integer initiatives, up from little than 40% successful 2021.

With nan acquisition of Ath0, OKTA still has a batch of cross-sell opportunities. This hasn't gone arsenic smoothly arsenic hoped fixed integration issues and attrition of Auth0 salesforce reps. However, nan institution has done a bully occupation upselling caller modules successful nan past and nan expertise to waste some workforce and customer personality solutions together should beryllium an opportunity.

Upsell

Company Presentation

Innovation and adding caller modules is different large opportunity. OKTA has done a bully occupation of introducing caller workforce personality products complete nan years. This is simply a cardinal measurement to thrust growth, and nan institution will adhd a privileged entree module this year.

New Modules

Company Presentation

Perhaps 1 of OKTA biggest opportunities successful nan adjacent word is simply a debased bar. In precocious November, nan institution forecast that FY24 gross maturation would slow to 16-17% versus nan statement calling for 27% growth.

On its Q3 2023 net call, CFO Brett Tighe said:

"With our continued attraction connected disbursal control, we are focused connected achieving non-GAAP profitability for FY '24 and an operating separator successful nan debased azygous digits. We're besides targeting a meaningful summation to free rate travel and free rate travel separator complete FY '23, and we'll supply much circumstantial rate travel comments connected our Q4 call. From a gross perspective, we are factoring successful nan execution challenges we faced this year, nan go-to-market activity modulation and nan increasing uncertainties of nan macroeconomic environment. We estimate full gross to beryllium successful nan scope of $2.130 cardinal to $2.145 cardinal aliases maturation of 16% to 17%. While we had initially planned connected providing an update connected our semipermanent targets, we judge it's prudent to hold and revisit this erstwhile we person accrued visibility and assurance successful nan macro environment."

These numbers look beautiful conservative, and stocks often execute good aft companies reset nan barroom little and past leap complete it.

Risks

Competition, particularly from Microsoft (MSFT), is 1 nan biggest risks OKTA faces. MSFT's E3 and E5 bundles person personality information arsenic portion of their offering. Thus, if a institution is chiefly utilizing a MSFT stack, it fundamentally doesn't request OKTA.

Speaking astatine nan Needham Growth convention successful January, Tighe was defiant that MSFT was a immense challenge, saying:

"But what I would opportunity is, I mean, MSFT has ever been there, and MSFT will ever beryllium there. There is nary world wherever Active Directory doesn't beryllium aliases Azure AD doesn't exist, right? I mean nan vast, immense mostly of our customers person MSFT, right? They're a awesome competitor. They're a awesome company.

"If you want to beryllium a single-stack company, MSFT is going to win. We're not going to beryllium capable to compete pinch an E3 aliases E5 statement if it's 100% of your stack is connected MSFT, right? But I deliberation there's little and little of those customers retired there, right? You person to judge successful a world wherever ServiceNow, Salesforce, Workday, Zoom, I tin support going for nan adjacent 20 minutes connected number of companies retired location wouldn't exist. And that's wherever I deliberation OKTA really shines.

"So erstwhile you measurement retired of that single-stack mentality, that's wherever we do well. And I deliberation -- I mean, we do good moreover -- actually, for years, we've done a awesome job. We've been doing entree successful nan MSFT products amended than they have. You tin look astatine nan ratings connected their website. But I mean, they're going to make them better, right? Like it's their stack. They're going to make it better. You can't expect that to continue."

In summation to MSFT, OKTA has faced different challenges. Sale productivity has been down, and nan institution has seen a batch of attrition pinch its salesforce, peculiarly connected nan Auth0 broadside arsenic nan institution has tally into integration issues. Part of nan problem appears to beryllium hiring excessively galore caller reps (it recently announced layoffs) and its compensation was not precocious capable to clasp apical reps.

To this end, location will besides beryllium immoderate disruption arsenic nan institution changes salesforce activity to reside these problems. The institution has already said it doesn't spot overmuch betterment connected income productivity for 2024.

Valuation

SaaS companies are mostly weighted based connected a income aggregate fixed their precocious gross margins and nan companies wanting to pump money backmost into income and trading to grow.

On that front, OKTA is weighted astatine a P/S ratio of astir 5.5x based connected nan FY 24 (ending January) statement for gross of $2.17 billion. Based connected nan FY25 income statement of $2.57 billion, it trades astatine a P/S aggregate of 4.7x.

In nan past, nan institution has often traded astatine complete 25x LTM sales. However, maturation is slowing from 40-50% a twelvemonth to astir 18% complete nan adjacent 2 years.

LTM P/S

FinBox

If nan banal could re-rate to a 6x aggregate of its FY25 revenue, OKTA would beryllium $100 stock.

Conclusion

Currently nan marketplace has been rewarding beaten-up maturation stocks that person been capable to jump complete vastly lowered bars. The jumps successful nan stocks of Roku (ROKU), Roblox (RBLX), and HubSpot (HUBS) this week are bully examples.

OKTA is different really bully illustration of this set-up. The institution has already taken down not conscionable Q4 expectations but FY24 expectations arsenic well. OKTA has immoderate challenges to proceed to overcome, but it's group itself up nicely to jump complete a debased bar.

Meanwhile, contempt nan rebound successful nan banal price, it is still trading astatine nan little scope of wherever it has traded historically and wherever galore SaaS names waste and acquisition currently. That's a bully look for a bully post-earnings popular if investor sentiment doesn't alteration betwixt and erstwhile nan institution reports results successful a mates of weeks.

This article was written by

Geoffrey Seiler floor plan picture

Former Senior Equity Analyst astatine $600M long-short hedge money Raging Capital.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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