Okta (NASDAQ:OKTA) is a cloud software company that provides identity and access management services, putting it in the scorching hot software-as-a-service arena.
Although shares of Okta are up 80% year-to-date, the company’s market capitalization of $14 billion puts the stock at the higher end of mid-cap territory, one of the market’s sweet spots. However, that may not be enough to entice investors over the near term. Okta stock resides almost 20% below its 52-week high. That’s not very encouraging.
Further muddying the near-term outlook for Okta stock is investors’ willingness to pay up for SaaS stocks, which have come under scrutiny this year for being richly valued. Indeed, Okta isn’t a value play. The shares trade around 26 times next year’s sales and 35.4 times book value.
That said, Okta stock has the potential to justify those frothy multiples. For its fiscal third quarter, the company said total revenue jumped 45% while subscription revenue surged 48%. Additionally, the subscription revenue backlog (performance obligations in industry lingo) topped $1 billion.
“Industry leading growth in subscription revenue, remaining performance obligations, and billings were driven by strong execution and the continued secular tailwinds of increasing adoption of cloud applications, digital transformation as companies improve how they connect with their employees and customers, and deployment of zero trust security environments,” Okta CEO Todd McKinnon said.
Street Views on Okta Stock
To say Wall Street is divided on Okta stock may be a stretch, but there isn’t a consensus on the cloud security name, either. Twenty sell-side analysts cover the name, a hefty amount for a company with a $14 billion market value. Thirteen are bullish or very bullish on the stock. Seven have the equivalent of “neutral” ratings. In other words, investors can certainly find other names that drum more division among analysts than Okta.
Count D.A. Davidson analyst Andrew Nowinski among the Okta stock bulls.
“First, Okta offers the only neutral platform, which is a critical differentiating factor when customers choose a single sign-on solution,” he said in a note out last month. “Second, the company recently launched some new products, including the Okta Access Gateway, which extends Okta’s reach to on-premise applications. Third, Okta continues to gain traction with the customer identity use case, which we believe is a large market opportunity that will continue to ramp (currently only 30% of new billings). Finally, free cash flow is expected to be positive this year and will continue growing.”
The consensus price target is near $140, but the shares closed just over $115 on Dec. 19. As is the case with many growth names, there are wider-ranging themes at play with Okta. For example, the identity-as-a-service market continues to grow.
That market is expected to grow from $2.5 billion this year to $6.5 billion by 2024.
The access management arena, Okta’s core competency, is booming. And positively, the company is cementing its status as a leader in that market. Gartner recently highlighted Okta’s rise within the quadrant, noting the company’s “market responsiveness and extensibility in authentication.”
Bottom Line: It’s a Numbers Game
In finance, it’s always about numbers, but that’s particularly true of growth stocks like Okta. In order for the stock to continue warranting premium valuations, the company likely needs to grow revenue at about 30% and cash flow margins by around 20% or more over the next several years. Cash flow was just 7% of revenue in the third quarter, so there’s ample room for growth.
That is one way of saying that a path to profitability would surely boost the case for Okta stock. This year, investors have some willingness to tolerate lack of profits — if the company operates in the right market segment and is growing revenue. Okta checks those boxes, but at these multiples, it would be best if the company doesn’t try investors’ patience.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.