Okta Inc (NASDAQ: OKTA), a cloud identity management firm, provides enterprise identification. Since Okta’s stock has experienced significant volatility over the past year, investors are still determining the best time to invest in this high-growth software business. In this piece, we’ll examine Okta in more detail and determine whether or not to purchase its shares in 2023.
Overview of Okta’s Business
Okta was established in 2009 and went public in 2017. The business offers cloud-based software to companies to manage and protect application user authentication. Thanks to Okta’s technology, employees can single sign-on to all their cloud apps from one unified interface. Employees won’t have to remember the many passwords they would have generally needed for each app.
Okta benefits from the development of cloud software and the increase of identity access management, two significant effects. The business integrates over 7,000 cloud apps, including Salesforce, Workday, and Slack. Demand for Okta’s services increases as more firms adopt cloud computing. The Okta platform offers API access management, adaptive multi-factor authentication, role-based access restrictions, and additional security features.
The primary source of revenue for Okta is subscriptions. Over 15,000 clients, including 20% of the Fortune 500, use the company’s services. Slack, Flexport, JetBlue, Nordstrom, and Twilio are a few of Okta’s top clients.
Okta’s Growth Story
Since its IPO, Okta has seen enormous growth. The company’s revenues have increased at a compound annual rate of 50% during the last five years. Revenue for Okta increased by 56% year over year to $1.3 billion in the fiscal year 2022 (which concluded in January 2022). For the fiscal year 2023, the business anticipates revenues of $1.78-1.79 billion, a 36-37% rise.
Like other high-growth SaaS stocks, Okta is yet to be profitable. Gross margins have increased considerably over the past year, and they have been averaging about 75%. To gain market share, Okta has made significant investments in sales, marketing, and R&D. This led to operating losses in fiscal 2022 that were around $270 million. However, the business can become profitable in the following few years if revenues increase.
Reasons to Buy Okta Stock
The following are some of the significant bull cases for the Okta stock:
Massive market potential of $80 billion: Okta is securing a piece of the enormous and quickly expanding identity management industry. Demand for Okta’s services could increase as more companies move their operations to the cloud.
Position of leadership: With nearly double the market share of the runner-up, Ping Identity, Okta is the industry leader in identity access management. The business is in an excellent position to exploit this significant potential.
Effective upselling: Okta maintains dollar-based net retention rates of about 120%, demonstrating its strong client retention. Revenue that is highly predictable and recurrent results from high client retention.
Okta has a variety of growth levers at its disposal, including adding to its existing base of customers, winning over new ones, and developing new features and products. Another development engine that is still in its early phases is international expansion.
High switching costs: It is difficult to tear and replace Okta after enterprises have integrated it into their infrastructure. Okta now has a competitive advantage and a financial buffer.
Reasons for Caution on Okta
When considering purchasing Okta stock, there are a few more reasons to exercise caution:
No profits yet – Despite a significant increase in income, Okta is still in the red. Okta can take longer than anticipated to become profitable.
Increased competition: Okta competes with companies like Microsoft, CyberArk, and Ping Identity for market share in a competitive business. Growth and profitability may be impacted by heightened competition.
Value issues: Despite dropping more than 75% from its highs, OKTA still trades at about 11 times the forecast sales. For a business that is still losing money, this is pricey.
Macro-uncertainty: Rising interest rates, inflation, and recession worries have harmed several software equities. Valuation shrinkage may persist until macroeconomic conditions are stabilized.
Is Okta Stock a Buy in 2023?
Given the potential for losses to last longer than expected, Okta stock is potentially risky. However, many of these concerns have been factored in following the stock’s sharp collapse.
Okta continues to dominate a sizable market and offers several growth opportunities. The business may achieve profitability in two years.
Okta seems appealing at these levels for investors with a high-risk tolerance ready to face volatility. As long as the benefits of identity management continue, the stock may outperform the market in the coming three to five years.
Investors with less zeal may hold off until there is a better entry moment. However, for long-term investors who can see past short-term uncertainties, Okta is an appealing investment.
5 Key Takeaways on Okta Stock:
Okta offers software for identity management and access to businesses moving to the cloud.
Although revenue growth has been exceptional, profitability has remained elusive as Okta spends on gaining market share.
Bull’s argument is based on the enormous $80 billion market potential and industry leadership.
Although it has significantly decreased from its high levels, valuation is still pricey.
Current levels may serve as an excellent long-term entry point for risk-tolerant investors.
Frequently Asked Questions About Okta Stock
Does Okta pay a dividend?
No, Okta does not currently pay a dividend. The business continues to lose money while investing in expansion. Till it achieves continuous profitability, Okta is unlikely to start paying dividends.
Is Okta stock overvalued?
Okta has dramatically decreased since its top value last year. The stock is still costly but more acceptable in light of growth projections at about 11x projected sales. The primary controversy is still the profitability timetable.
Is Okta a buyout target?
A more established technology business may ultimately purchase Okta. However, considering Okta’s continued high value and lack of earnings, an acquisition seems unlikely in the foreseeable future. The rapid growth trajectory of Okta significantly reduces the allure of existing assets.
Will Okta stock rebound in 2023?
Okta seems prepared to recover in 2023 after seeing a decline in 2022. A rebound rally could be sparked by accelerating revenue growth, a probable road to profitability, and a low valuation. Macro uncertainty and competitiveness, however, continue to be dangerous.
Does Okta stock have a future?
Okta retains dominance in its specialized market while operating in a constantly expanding sector. Okta is in a strong position for long-term growth, notwithstanding the concerns. Despite short-term volatility, investors with five years or more time horizons may still achieve excellent returns.