In late September 2019, shares of identity cloud platform company Okta (NASDAQ:OKTA) were tumbling towards $100 amid a broader shift out of momentum and growth stocks. I wrote on InvestorPlace.com that the selloff was overdone, and that OKTA stock at $100 looked like a compelling buying opportunity for three big reasons.
First, the valuation underlying OKTA stock was favorable at those levels, and left room for healthy upside potential. Second, the fundamentals and optics surrounding Okta were positioned to improve heading into 2020. Third, the technicals pointed to a bottom in the stock.
Fast forward two months.
OKTA stock jumped 30% to trade above $130 by late November. To be sure, shares pulled back towards $120 in early December. But, in the big picture, this pullback is just noise. Zooming out, recent strength in the stock should persist for the same three big reasons Okta looked like a strong buy at $100.
First, the valuation underlying OKTA stock remains favorable. Second, the fundamentals surrounding the company continue to improve. Third, the technicals support a continued uptrend in shares.
The Valuation Remains Favorable
The first big reason that recent strength in Okta stock should persist is that shares remain reasonably valued at $120.
Okta is a long-term winner with huge profit growth potential. In a nutshell, this company is the leader in the cloud-based identity access management (or IAM) market. This is a secular growth market driven by multiple catalysts. Most importantly, companies are increasingly adopting IAM solutions thanks to the proliferation of internet-connected devices in an enterprise network from trends such as bring-your-own-device and the Internet of Things. Further, these companies are ditching their legacy IAM solutions in favor of cloud IAM solutions, because of the broader enterprise cloud transformation.
These secular trends imply huge growth for Okta in the long run. According to Grandview Research, global IAM spend measured $9.9 billion in 2018. Gartner pegs global IT spend in 2018 at $3.65 trillion. Thus, global IAM spend measured just 0.3% of global IT spend in 2018. That share will grow over time as more and more companies pivot towards identity-based security solutions, in order to better accommodate their increasingly complex and decentralized enterprise tech ecosystems.
At the same time, global IT spend will sustain its historically normal 2%-3% growth rate. That combination ultimately makes 13%-15% growth in the global IAM market seem achievable in the long run. In that space, Okta will expand market share, thanks to addressable market expansion and the cloud pivot. Share expansion in a 13%-15% growth market implies it can count on 20%-plus revenue growth for a lot longer.
At the same time, this company operates at gross margins that are quickly closing in on 80%. With gross margins that high, all Okta needs to do to enjoy huge profits at scale is keep expense growth below revenue growth, so below 20%. That seems totally achievable in the long run.
Overall, I think Okta has the potential to do about $11 in earnings per share by 2030. Based on an application software sector-average 35-times forward earnings multiple and a 10% annual discount rate, that equates to a 2019 price target for OKTA stock of nearly $150.
The Fundamentals Continue to Improve
The second big reason that Okta’s recent strength should persist is that the fundamentals surrounding the company continue to improve heading into 2020.
Okta sells to enterprises. Thus, when enterprises are spending big, more money flows into its platform. When enterprises aren’t spending big, less money flows in.
Since early 2018, businesses around the world haven’t been spending big. That’s because escalating U.S.-China trade tensions dampened business enthusiasm, which caused cuts to capital spending plans.
Now, though, those escalating U.S.-China trade tensions are finally easing — and they should continue to ease into 2020.
As they do, business leaders will become more enthusiastic about the near-term economic outlook. They will consequently re-up their capital spending plans. While this occurs, businesses will more aggressively continue on their cloud transformation plans, and a big part of that includes buying Okta’s cloud IAM solutions.
Because of this reinvigorated business enthusiasm tailwind, Okta should continue to report above-consensus numbers into 2020.
The Technicals Imply Further Upside
The third big reason that recent strength in OKTA stock should persist is that the technicals imply that shares are on a sustainable, new uptrend.
Specifically, Okta’s 50-day moving average has been sloping negative ever since September. And recently, it crossed below the 200-day moving average, which remains upward sloping. As soon as it did, though, the slope of the 50-day moving average turned around, and the 50-day popped back above the 200-day.
Today, both the 50-day and 200-day moving averages are sloping up, with the 50-day above the 200-day.
In other words, from a technical standpoint, recent turbulence in OKTA stock has passed, and shares are now in the early stages of forming a new, sustainable uptrend.
Bottom Line on OKTA Stock
Okta was a great buy at $100 in late September because the valuation was favorable, the fundamentals were positioned to improve and the technicals supported the bull thesis. And since then, the stock has risen more than 20%.
OKTA stock will continue to rally from $120 in early December for the same three reasons: The valuation remains reasonable, the fundamentals continue to improve and the technicals continue to support the bull thesis. As such, I wouldn’t be surprised to see shares make a move towards their $140 all time highs soon.
As of this writing, Luke Lango was long OKTA.
