Okta Remains Attractive Even as We Lower Our Long-Term Profitability Assumptions; FVE to $193

Business Strategy & Outlook

Enabling access management and protecting networks from malicious actors based upon identity credentials are cornerstones of cybersecurity, and the dissipation of a distinct security perimeter could make security teams further rely on user-based cybersecurity. Okta’s cloud-based identity access solutions upended the prevailing methodology of protecting users and providing access to digital resources based upon on-premises products. Okta’s innovative solutions for user access and security will provide it with a durable presence, and strong revenue growth is forecasted alongside significant margin expansion.

Okta addresses two primary markets through its workforce identity and customer identity products. Workforce identity affords protection and allows access for a customer’s employees, contractors, and partners, while customer identity is for enabling a customer’s customers. Okta melded these two distinct markets within its identity cloud, and has a robust integration network that simplifies identity access and security protocols for the applications its customers rely on. Okta’s solutions are anticipated to be in high demand due to entities desiring a seamless experience for its employees and customers when accessing requested applications, while also ensuring that networks are protected. Always-connected distributed workforces are increasingly using more cloud-based resources, which amplifies the complexity of cybersecurity. Okta’s network of application integrations provide it with a unique selling proposition in that entities can holistically provide identity access across their cloud-based and on-premises applications in a manageable fashion. Alongside a rapidly expanding customer base and gaining more clients with larger deals, Okta is migrating upstream to land more enterprise clients and expanding internationally. The company has become a favorable partner with large system integrators, which are expected to help its growth plan with large customers undergoing digital transformation and market expansion efforts.

Financial Strengths

Okta is a financially sound company that is expected to generate strong free cash flow while expanding its operating margin profile. The company has historically operated at a loss, and Okta can become profitable by fiscal 2026 on an adjusted basis. Okta’s financial plan is viewed in line with a land-and-expand strategy, whereby Okta initially has elevated sales and marketing to gain a customer cohort before expanding its revenue per customer while lowering its operating costs per customer (on a revenue percentage basis). Okta can benefit from cross-selling and up-selling tangential products while developing a stickier customer base by further penetrating the enterprise and government markets. At the end of fiscal 2022, Okta had $2.5 billion in cash and cash equivalents, $16 million of 2023 convertible senior notes, and $1.8 billion of 2025 and 2026 convertible senior notes. The 2023 notes have a 0.25% fixed interest rate per year and have an initial conversion price of about $48.26. The 2025 notes have a 0.125% fixed interest rate per year and have an initial conversion price of about $188.71. The 2026 notes have a 0.375% fixed interest rate per year with an initial conversion price around $236.80. Okta uses note hedges, warrants, and capped calls to alleviate the effects of senior notes converting.

Bulls Say

Okta’s novel cloud-based approach for identity access management should continue to attract new customers while margin expansion comes from prolific revenue growth outpacing expenses.

The independence of its integration network can make Okta a favorable choice for customers using resources across public clouds, private clouds, and on-premises.

As Okta moves upstream, it can land higher-value deals with larger, stickier customers. Additionally, ample cross-selling and up-selling opportunities exist between Okta’s workforce identity and customer identity products.

Company Description

Okta sells solutions for identity and access management. Its workforce offerings contain products to protect and enable employees, contractors, and partners, while customer identity and access products securely enable an organizations’ customers to use applications. Okta’s software solutions are cloud-delivered, and its integration network gives customers security protection and access across a wide variety of applications that are critical to business and government needs. The California-based company went public in 2017.

(Source: Morningstar)

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