After peaking at $140, Okta (NASDAQ:OKTA) needs to sustain its uptrend that began in October. Otherwise, with short float at 9.44%, bears may more confidently bet against the Okta stock.
Even though the company issued a strong Q3 beat with upside Q4 guidance, Okta stock is slipping lower. Why are investors not willing to pay a premium?
Okta reported subscription revenue growing 48% to $144.5 million. Gross margin was 77.8%, beating the 76.7% consensus estimate. Its identity management platform for the enterprise now has 7,400 total customers, 1,325 customers have an ACV (annualized contract value) of over $100,000, up 41% from last year.
Its dollar-based net retention rate on Oct. 31 was 117%. CAGR (compounded annual growth rate) is 50% since FY 2020 through to FY 2020 in which it forecasts revenue of $574 – $575 million.
Bears may look at the higher R&D expenses of $41.8 million, up 52% from last year, as a reason to express pessimism. Yet the product development is paying off. In the quarter, it grew its customer base and counts on Levi’s, Warner Media, MLB, Lyft, and Nordstrom as its customers adding to its security network effect.
The 45% total revenue growth and subscription growth justifies the stock’s valuations. The company offers companies production from modern security threats. Its identity solution secures its workforce through Okta’s sign-on process. So, by offloading password resets and providing enhanced security with multi-factor authentication, Okta is adding more customers quarterly.
New Products Drive Stronger Outlook
Okta Access Gateway gained traction in the quarter. And the launch of Okta security insights should lead to higher cross-selling opportunities. With new products along with growing subscriptions, Okta was able to issue a strong full-year fiscal 2020 outlook.
It expects revenue of $574 – $575 million, up 44% Y/Y. Operating loss (non-GAAP) will be $53.1 million to $52.1 million. For the fiscal year 2021, revenue will be in the range of $750 million to $760 million.
Okta is benefiting from secure trends of digital transformation, Cloud, and healthy growth internationally. To capture long-term growth opportunities internationally, Okta will continue investing there. Management said that it feels like the demand for its products is very strong outside the U.S.
Customers have a need to fulfill digital transformation initiatives and this includes adopting cloud tools. So, as its customers move away from legacy systems towards Okta’s platform, revenues will keep growing.
Okta also benefits from Oracle (NASDAQ:ORCL) investing less in its identity management solution. Microsoft (NASDAQ:MSFT) is reducing its focus on legacy identity management. This trend lets Okta develop products that facilitate access to cloud products through “Okta Access Gateway.”
Okta has the scale to win more business deals, and its product is differentiated against its competitors. Because Okta uses a Zero Trust security model, its customers get the best level of protection. By not trusting anything because it is on a particular network, the security model ensures it knows which user is logged in.
Your Takeaway on Okta Stock
Since Okta proved it can solve problems for customers, a growing number of larger enterprises will choose its solution. And because it is building an extensible platform that can connect to the customer’s cloud or on-premise platform, adoption is easy. Add the strong trends of digital transformation and investors will realize that the business may grow at a quicker pace beyond FY 2021.
Take a slow and measured approach when investing in Okta. The stock traded at $30 two years ago and then doubled to $60 last year. It is now in the ~$120 range. Profit-taking may send OKTA lower while strong quarterly results will help it rebound.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.