Some investors might not understand what Okta (NASDAQ:OKTA) does, but given that OKTA stock has nearly doubled this year, it makes sense to take a closer look.
Okta opens for trade July 10 at almost $223 per share, a market cap of $27.4 billion. It sells for 46 times last year’s revenue. As with many hot stocks, we can’t talk price to earnings because there are no earnings.
Okta was founded in 2009, at the bottom of the last recession, by former Salesforce.com (NYSE:CRM) executives Todd McKinnon and Frederic Kerrest.
It went public in April 2017 at $17/share, a market cap of $1.54 billion. That means investors who got in at the IPO have a “10-bagger,” their investment being worth more than 10 times what they paid.
Okta is called a “work from home” stock because its technology helps companies maintain security while people work remotely.
A Closer Look at OKTA Stock
Okta provides a cloud-based identity management system. That means employees can sign-in from home once and not have to do it again, no matter what software the employer has them using or where it is.
If they’re using Salesforce to manage customers and Microsoft (NASDAQ:MSFT) for office applications, they’re on. Same if they’re using Oracle (NASDAQ:ORCL) and Alphabet (NASDAQ:GOOGL) Google apps.
Whether it’s software as a service (SaaS) or a corporate network, one sign-on does it all. This also helps companies migrate from on-premise applications to the cloud by making identity portable.
I have worked at home for decades, and the only way I can manage my own identity is with software. My wife has a rotating list of passwords that her employer makes her update regularly. My children complain that everything they do requires a different sign-on.
Okta puts all that in the background by creating a “federation” of identity built on a single credential, created with software called OAuth2. Since the underlying software is an open standard, it scales easily. The company recently signed an alliance with other, similar companies, including Crowdstrike (NASDAQ:CRWD) and Proofpoint (NASDAQ:PFPT), to help implement this new “zero trust” identity framework.
Okta Is Expensive
Since going public Okta’s revenues have more than tripled. Revenue for the April quarter was up 50% from a year earlier. Operating cash flow has been positive for two years, and it’s accelerating.
But conventional analysts call the current price insane. The stock is well above the average one-year price target, which is under $200. Of 17 analysts, 6 are now in the “hold” camp. BTIG’s Gray Powell is one of the analysts getting a nosebleed, telling investors to take profits.
If you’re already in the stock this sounds reasonable. A profit isn’t a profit until you sell the asset and have the cash. If you have 10 shares you can sell 5, let the rest ride, and not worry about a fall. As with many software stocks, there’s a huge disconnect between the reality of the business and the stock price.
The Bottom Line
But what if you’re not in Okta stock?
In that case you should know that, while its niche is sustainable, you’re not really investing. You’re speculating, chasing a hot stock in hope of a quick profit.
That works in today’s market. Ask anyone who bought Tesla (NASDAQ:TSLA). In terms of the actual business, the best at Okta is yet to come. Some analysts continue to recommend Okta stock with targets higher than its current price.
But we are in a bubble. That bubble will pop, either when expectations can’t be met, or speculators find another shiny object to chase. When that happens, you’ll still have stock in a good company. I think investors should wait for that.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.
