In May 2021, multiple accounts associated with hacking group DarkSide received $4.4 million worth of ransom in Bitcoin (CCC:BTC-USD) after a cyberattack on the Colonial Pipeline. The impact of this attack led to a significant increase in gas prices. It also left some stations on the East Coast empty for a period. Ultimately, this event thrust cybersecurity stocks like Okta (NASDAQ:OKTA) stock back into the spotlight.
You might be quick to add OKTA stock to your list of cybersecurity companies to buy after this attack. After all, it’s a company that specializes in identity security. However, the bullish case doesn’t come without some challenges.
So, here’s a closer look at whether Okta is worth buying in 2021.
OKTA Stock Has Ongoing Advantages
While some investing trends come and go (just take a look at the whacky ride meme stocks have been going on), one thing is guaranteed moving forward. Cybersecurity — and the companies that specialize in the space — will remain invaluable.
In our increasingly hyper-connected world, the need for digital security services has no end. When it comes to Okta’s offerings in this space, it provides high-quality security solutions to identity protection.
Breaking it down a bit further, the company offers a cloud-based security system that’s capable of intertwining with on-site applications. It’s designed to support modern work-based ecosystems that frequently rely on a combination of multiple cloud applications, user devices like laptops and phones, as well as external users’ (customers or business partners) systems and own custom apps.
The more “inhabitants” in the ecosystem, the greater the number of security risks it carries (and the more complex it becomes for IT teams to handle). So, rather than require multiple logins for each element and user, Okta links them through a single sign-on using its secure process. Okta also allows you to combine multi-factor authentication functionality with its customizable “Universal Directory.” Essentially, this helps IT teams determine the level of access per user within the entire system.
That’s a super fancy way of saying Okta’s services are a strong solution to your modern IT team’s day-to-day problems. According to the company, it enables companies to “[overcome] the economic and technological limitations of any legacy identity management scheme […] [they] are currently using.”
This is all highly relevant to the investment thesis behind OKTA stock. After all, its unique security solution is the lifeblood of the company’s future. And that future is bright.
With the onset of an increasingly remote workforce upon us, alongside the arrival of a “Cyber Pandemic,” — both of which were byproducts of the social impact of Covid-19 — IT solutions should remain hot commodities long-term. Consider the following:
- “The percentage of workers permanently working from home is expected to double in 2021.”
- “Worldwide cybercrime costs will hit $6 trillion annually by 2021.”
- “Security services accounted for an estimated 50% of cybersecurity budgets in 2020.”
- Looking at the frequency of ransomware attacks alone, the rate has increased from one every 40 seconds in 2016 to an attack every 11 seconds in 2021.
Clearly, companies are now willing to fork out the dough to stay safe. And the need for this safety is only growing. All of this should keep Okta in business for years to come. It should also help drive OKTA stock over a longer-term time frame.
But, as with most investment cases, things aren’t that simple.
The Downsides with Okta
While OKTA stock had a strong run in 2020 (a 115% increase), it’s down about 10% so far in 2021. Much of that could be attributed to the pandemic catalyst tapering off. However, slowing revenue growth is another likely cause.
Last year, Okta experienced massive 40% growth. The company now projects 30% revenue growth for next year. As The Motley Fool’s Travis Hoium explains, “with growth stocks, any reduction in the expected growth rate of the company can cause shares to plummet.”
The difference between 30% and 40% growth might not seem significant to some. However, several analysts issued price-target downgrades on the news earlier this year. Piper Sandler issued a cut to $235 from their $250 price target (a 6% reduction). Likewise, BMO Capital Markets changed its target from $285 to $265 (a 7% reduction).
The reduced growth projections (alongside dwindling post-pandemic hype) is a large reason for Okta’s pain in 2021. But there are also valuation concerns to contend with. At the start of the year, tech stocks suffered a selloff. Much of that’s due to inflated valuations within the space and continuing concerns that we’re in a tech bubble.
Whether or not you agree with that broader market assessment, many argue that the valuation for OKTA stock is pricey relative to its peers. Plus, this concern gains further traction when you consider the following: “More than 70 percent of security executives believe that their budgets for fiscal year 2021 will shrink.” If these executives are correct, that could intensify the prospective reduction in Okta’s growth.
Is OKTA Stock an Ugly Buy?
That certainly puts a dent in the bullish case for OKTA stock. But I don’t think it should be taken as a sign of complete doom.
When it comes to Okta, there’s nothing exceptionally ugly about the company. However, the valuation and growth concerns are legitimate, depending on what you expect from the stock. As such, there are at least two core questions to ask yourself moving forward:
- Do you expect Okta to continue growing near the 40% rate it enjoyed last year? Okta projects a 10% reduction in growth and this coincides with the anticipated reduction in security budgets for 2021 (70%-plus of executives expect this to happen). If you’re looking for Okta to keep growing at a higher rate, then it might be time to walk away.
- Do you believe in Okta’s long-term viability? As mentioned earlier, the world is only getting more remote and IT security systems are only getting more intricate and necessary. Okta is a key player in this space and its services are generally well-regarded. If it continues to produce high-quality solutions, the company should have a strong foundation for continued growth (albeit at a less impressive rate).
Ultimately, when it comes to OKTA stock, I don’t think there’s reason to drop it. Unless, of course, you’re seeking more impressive growth narratives. Moving forward, longer-term investors ought to pay close attention to its continued viability to compete successfully in the cybersecurity space.
Robert Waldo is a web editor for InvestorPlace.com. On the date of publication, he did not hold a position (either directly or indirectly) in any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
