2023-06-09 12:50:27 ET
Summary
- Okta, Inc. provides secure and seamless user authentication and access management solutions.
- Okta's customer adoption rates are driven by a growing customer base rather than relying on price hikes.
- Investor misinterpretation of Okta's growth rates overlooks the potential for improvement with easier comparables and positive investor impressions.
- Okta's valuation appears relatively expensive compared to Palo Alto Networks with a forward EPS multiple of 74x.
Investment Thesis
Okta, Inc. (OKTA) is a business that I remain bullish on. The investment thesis is not straightforward. There's a lot of nuance for us to go through.
Here, I describe the bull case, pointing to its customer adoption rates and levers that could drive its revenue growth rates higher next year. But I also highlight some negative considerations, including, but not limited to its valuation.
Why Okta? Why Now?
Okta provides identity and access management solutions. Okta is focused on ensuring secure and seamless user authentication. You can think of it as a login portal like you probably use with your ''Google Sign In'' on websites.
Okta's single sign-on (''SSO'') product provides a centralized user management offering delivering enhanced security. Okta's platform allows organizations to securely access a multi-cloud environment from any device.
Moving on, if you've read my previous analysis of SaaS companies, you'll know that I strongly discourage investing in businesses that rely on price hikes to fuel their revenue growth rates. I've described this on countless occasions, but you can look to Snowflake Inc. ( SNOW ) here as one example.
Allow me to explain what we see above. Above you see two figures:
- You see net retention rates for the trailing twelve months of 17%
- And total customer growth of +14%.
The first figure shows how much Okta is relying on cross-selling to its existing customer base, over the past twelve months, which is up 17%.
Meanwhile, its total customer count grew by 14%. I believe that revenue growth rates that are driven by a rapidly growing customer base are of far higher quality than one that relies on hiking prices. Why?
Because in the first instance, you can only hike your product so much. In the second instance, by increasing your product too much, you allow room for competitors to come in, something you never want.
You never want to lose market share on pricing. Because once you lose a customer, it's practically impossible to get it back, because of all the coding that is required to incorporate one's systems, it's just too prohibitively expensive to switch from one product to another and back again.
In other words, Okta has a healthy customer adoption curve.
As we proceed, I'll first discuss the bull case and then the bear case facing the stock. Hopefully, providing you with enough insights that will allow you to make up your mind.
Revenue Growth Rates Point Toward A Slowdown
Investors look towards Okta as a business that has lost its hyper-growth label. However, I believe that investors are misinterpreting Okta's growth rates.
In the first instance, fiscal Q1 2024 was the most challenging comparable. Okta acquired Auth0 early in fiscal 2022, so there was still some inorganic growth left in its fiscal Q1 2023 results. More specifically, Okta acquired Auth0 in the middle of fiscal Q1 2022.
Secondly, everyone knows that the IT sector has been through a period of exaggerated expansion and that now there's a period of digestion. Accordingly, it makes sense that, as a result of this factor, Okta's revenue growth rates will slow down.
This leads me to my third argument. This is not where the story ends for Okta. Next year, the comparables will become dramatically easier for Okta, which will provide a tailwind to its growth rates.
And now, my fourth point: I believe that management is leaving itself substantial room to positively impress investors towards the back half of fiscal 2024.
SA Premium
Above, I highlight 4 different reasons why Okta's growth prospects are taking a breather, but its revenue growth rates are not going to continue slowing down at the pace they have over the last 6 quarters; if we include the next guided quarter fiscal Q2 2024.
Next, we'll discuss the bearish aspects facing this stock.
Okta Is No Palo Alto Networks
Consider this graphic below:
I'll admit that I'm biased in what I'm about to say. After all, I've been recommending Palo Alto Networks, Inc. ( PANW ) stock to paying members for close to a year. And I recognize that investors don't like to hear what I'm about to say.
But valuation matters. You see, the thing is, in the short term, in the market, all that matters is the story. Having the best story is the best driver of the stock in the very near term. But over the longer term, you don't have to say much. The best example I know of this is Dillard's ( DDS ).
Dillard's is such a poorly followed company, that even I have more people following me than they do. It's such a hated stock with 20% of its stock sold short. Dillard's doesn't even do conference calls. And yet. And yet, DDS stock continues to move up and to the right.
This is my critical contention: valuations matter. People can say whatever they want in the short term, but in the long term the market is a weighing machine, as the man, Benjamin Graham, said.
According to my estimates , Palo Alto Networks is priced at about 40x next year's EPS. This is my assumption. Palo Alto Networks has been focused on being profitable before being profitable ''was even cool.''
And Okta? You see, the thing is, if I say that Okta is priced at 74x forward EPS it doesn't look as interesting as Palo Alto Networks. Particularly given that Palo Alto is growing at somewhere close to the high 20% CAGR, while Okta is expected to grow around the low 20%.
The Bottom Line
Okta, Inc.'s valuation has been weighing down the stock. However, I believe that it's customer adoption curve is a reflection of the overall health of the platform, particularly as it compares against the prior year quarter, which included the acquisition of Auth0.
I make the case that although Okta, Inc. is not growing quite as fast as Palo Alto Networks, there are enough levers to ignite Okta's revenue growth rates next fiscal year. Simply put, Okta's story may seem to end here, but it's intrinsic value should continue to grow. Leading to new story to emerge in the not too distant future.
For further details see:
Okta Vs. Palo Alto Networks: Vision Vs. Valuation