Okta Is Discounted For A Good Reason - Initiate Cautious Buy (2024)

OKTA Continues To Offer A Compelling Cybersecurity Investment Thesis, Thanks To Its Sticky Consumer Base

We previously covered Microsoft (MSFT), CrowdStrike (CRWD), and Palo Alto Networks (PANW) in various other articles, covering their stocks' optimistic rally thanks to the robust cybersecurity booking trends, attributed to the sustained cloud migration after the COVID-19 pandemic and now renewed, thanks to the generative AI boom.

For this particular article, we will be looking at Okta (NASDAQ:OKTA) and sharing our findings about the stock, continuing the theme surrounding the cybersecurity sector.

OKTA is a cybersecurity SaaS company that offers secure digital access technology to cloud-based consumers ranging from Small-Medium-Sized-Businesses to Enterprises, universities, and government agencies, also known as "single-point user authentication."

As a testament to its robust market share at 22.15%, it was unsurprising that the company had reported an impressive 4Y top line CAGR of +40.2% between FY2020 (CY2019) and FY2024 (CY2023), while finally turning moderately profitable in FY2024 (CY2023).

This had also triggered the stock's impressive 3Y returns of +240% compared to the wider market at +77% between CY2019 and CY2021.

Unfortunately, OKTA also reported a series of security breaches in January 2022 and August 2023, triggering the painful corrections in its market cap and stock prices by over -60% at its worst, as the management also lost some credibility as a cybersecurity company.

Then again, it is important to highlight that OKTA is not the only one targeted by hackers, with MSFT and CRWD facing similar issues to varying degrees, an expected outcome due to the sustained internet proliferation and cloud migration.

For now, we believe that it is important to highlight OKTA's double-beat FQ1'25 earnings call, with overall revenues of $617M (+1.9% QoQ/ +19.1% YoY) and adj EPS of $0.65 (+3.1% QoQ/ +195.4% YoY).

With growing annualized subscription revenues of $2.41B (+2% QoQ/ +19.8% YoY) and expanding subscription gross margins of 83.5% (-0.2 points QoQ/ +2 YoY), it is apparent that consumer demand for its cybersecurity offerings remains robust, despite the potential headwinds from the breaches thus far.

The same has been observed in its growing total customers to 19.1K (+0.15K QoQ/ +1.05K YoY) and excellent TTM Net Retention Dollar rate of 111% (inline QoQ/ +6 YoY), implying its ability to consistently cross-sell to existing consumers while driving new adoption.

Readers must also note that OKTA's bottom-line improvements are largely attributed to the management's optimized operational costs (reduced headcounts, amongst others) at a time of elongated sales cycle.

This has resulted in its expanding adj operating incomes of $133M (+3.1% QoQ/ +259.4% YoY) and richer margins of 22% (+1 points QoQ/ +15 YoY).

Lastly, OKTA has offered a rather promising FY2025 revenue guidance of $2.535B (+12% YoY), adj operating margins of 19.5% (+5.5 points YoY), and adj EPS of $2.375 (+48.4% YoY), implying the management's confidence to delivering accelerated profitable growth ahead.

This is further aided by the large Total Addressable Market size of $80B, placing the cybersecurity company in a rather competitive position once the macroeconomic outlook normalizes.

OKTA Appears To Be Fairly Valued Compared To Its Peers

OKTA Valuations

For now, OKTA is trading at notably discounted FWD EV/ EBIT of 27.73x and FWD P/E of 36.96x. This is compared to its cybersecurity peers, such as CRWD at 82.27x/ 80.68x, Zscaler (ZS) at 55.99x/ 56.71x, PANW at 43.39x/ 52.74x, and Fortinet (FTNT) at 26.64x/ 32.74x, respectively.

The Consensus Forward Estimates

This is probably attributed to OKTA's mixed top/ bottom growth at a projected CAGR of +12.6%/ +25.8% through FY2026, lower compared to CRWD at +27.5%/ +27.9% and ZS at +26.2%/ +31.4%, though improved than PANW at +15.8%/ +18% and FTNT at +12.2%/ +12.5%, respectively.

These numbers imply that OKTA is reasonably valued at FWD P/E of 36.96x, offering interested investors with a decent margin of safety.

Readers must also remember that the company continues to report growing multi-year Remaining Performance Obligations [RPO] of $3.364B (inline QoQ/ +14.4% YoY) in the latest quarter, providing further insights into its intermediate-term top-line performance.

Combined with the growing Free Cash Flow generation of $214M (+28.9% QoQ/ +72.5% YoY) and richer margin of 35% (+7 points QoQ/ +11 YoY), we believe that OKTA remains well positioned to opportunistically invest in its growth ahead.

This is while reporting a healthier balance sheet, based on the net cash position of $1.16B in FQ1'25 (+11.5% QoQ/ +115.2% YoY).

So, Is OKTA Stock A Buy, Sell, or Hold?

OKTA 2Y Stock Price

For now, OKTA continues to be punished for the security breaches, with the stock failing to recover to pre-January 2022 and pre-August 2023 levels.

And this is also why we believe that OKTA's reasonable valuations offer opportunistic investors with the chance to dollar cost average, especially since the stock is trading near to our fair value estimates of $75. This is based on the LTM adj EPS of $2.03 and the FWD P/E of 36.96x.

Based on the consensus FY2026 adj EPS estimates of $3.18 (recently downgraded from $3.39, attributed to the management's cautionary tone in the recent earnings call), there remains an excellent upside potential of +32.4% to our long-term price target of $117.50 as well.

As a result of the attractive risk/ reward ratio, we are initiating a Buy rating for OKTA, though with no specific entry point since it depends on individual investors' dollar cost average and risk appetite.

For now, with the stock appearing to breach its previous support levels of $90, readers may want to observe its movement for a little longer and add upon a moderate retracement to its previous trading ranges at between $78 and $83, with it offering patient investors with an improved long-term upside potential.

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