Okta Stock Forecast: Growth with a Chance of Dominance

Some disruptive technology themes are more mature than others. Take cybersecurity as an example. Since the days of Norton Antivirus, cybersecurity companies have been hard at work trying to make sure the world’s computers remain secure. Consequently, we’re spoiled for choice when it comes to cybersecurity stocks. Rather than try to cherry-pick a few winners from the dozens of potential candidates out there, we decided to find the best cybersecurity ETF and invest in it. Easy peasy.

We’ve researched the cybersecurity domain consistently over the years, focusing mainly on the use of artificial intelligence in cybersecurity. Firms like CrowdStrike (CRWD) and Darktrace (DARK.L) have been reaping the rewards that come from outsmarting cybercriminals with sophisticated deep learning algorithms. Another niche we’ve been watching closely is biometrics and authentication. That’s mainly because of the below statement:

Real-time monitoring is part of the movement towards “Zero Trust” – trust no one and nothing, regardless of whether or not they’ve been authenticated inside or outside your networks. With over 80% of hacking-related breaches utilizing stolen or brute-forced identity credentials, the notion of monitoring someone once they’ve authenticated makes loads of sense. 

Credit: Nanalyze

We believe the notion of never trusting anyone within your network is extremely powerful. Guard the gates all you want, but the smarter strategy is to assume that everyone accessing your internal network is a crook. (And in come corporations, that’s truer than you might think.) This Dilbert cartoon sums up why zero trust hasn’t worked very well thus far.

This Dilbert cartoon sums up why zero trust hasn't worked very well thus far. Credit: Scott Adams
Credit: Scott Adams

The company that figures out zero trust access will disrupt many companies focused on guarding the gates. That’s the basic thesis for zero trust solutions, and it’s something we recently wrote about in a piece titled ForgeRock Stock: A “Never Login Again” Identity Platform. Here’s where we left this topic:

As risk-averse investors, we prefer to own market leaders. ForgeRock (FORG) is indeed a global identity leader, but their competitor – Okta (OKTA) – is 10X their size with 7X the revenues. If we wanted to invest in customer identity and access management (CIAM), we’d probably stick with Okta, even though it’s more richly valued.

Credit: Nanalyze

Today, we’re going to take a closer look at Okta and their high-growth identity management platform.

About Okta Stock

Click for company website

Founded in 2009, Okta became a unicorn in 2015, then had their initial public offering in 2017. Today, they’re a $34 billion software-as-aservice (SaaS) company with an industry-agnostic access management (AM) platform focused on both internal (employees) and external (customers) AM use cases. Its operations are a bit geographically diversified (16% international in 2021), and its clients – all 13,000 of them – tend to be small to midsize organizations. Revenue growth has been phenomenal, so expect Wall Street analysts to be stunned when it slows as the company scales (these “disappointments” represent buying opportunities).

A 54% compound annual revenue growth rate for Okta- Credit: Nanalyze
A 54% compound annual revenue growth rate – Credit: Nanalyze

Diving into the usual SaaS metrics we see net retention rate (basically, the ability to upsell existing clients) consistently staying in the range of 117% to 123% over time. Gross retention rate (customers who don’t cancel) isn’t provided but is said to be “strong.” (It’s really annoying when this number isn’t provided, and we’re not sure why so many SaaS companies don’t.) For a company that’s said to be focused on SMBs, Okta’s list of notable reference customers across all industries is impressive with 25% of the Global 2000 on board thus far. The latest investor deck is a bit long-winded but worth a look. Rest assured: this is a healthy pure-SaaS business that’s performed tremendously well so far. As potential investors, we’d like to know who might knock Okta off their pedestal.

Okta’s Competition

When trying to identify the market leader for any given enterprise software use case, we like to consult the Gartner Magic Quadrant which attempts to identify market leaders. Okta has been the leader in access management for five years running, at least based on lots of research performed by overpaid MBA types.

Gartner's Magic Quadrant for Access Management. Credit: Gartner
Credit: Gartner

Earlier this year, Okta acquired one of their competitors – Auth0 – which was also identified by Gartner as a leader in access management. As for the other leaders, we already talked about ForgeRock. They’re similar in size to another leader, Ping Identity (PING), a $2 billion publicly traded firm with revenue growth that appears to have stalled. Then there’s OneLogin which was acquired last month by One Identity which belongs to privately held software company Quest. And all these firms are competing with the trillion-pound gorilla in the room, Microsoft (MSFT).

Gartner’s Magic Quadrant report also shines some light on why they believe Okta should be seen as a leader among the rest. The main points are as follows:

  • Okta scored highest among all vendors for its product capabilities and ease of deployment
  • Okta received the highest score for customer experience
  • Okta scored highest for security, resiliency, and coverage
  • Okta scored very high in innovation, with the completed acquisition of Auth0 and its plans to invest above market average in R&D

Okta’s Total Addressable Market

Figuring out the total addressable market (TAM) for CIAM is tricky. It’s evident by the sporadic estimates that market research firms throw up which differ so much they’re largely useless. What many of these firms seem to agree on is that the CIAM opportunity will double in the next five years or so. Okta’s recent investor deck posits the opportunity at around $80 billion.

Okta's recent investor deck posits the CIAM opportunity at around $80 billion. Credit: Okta
Credit: Okta

When you consider that Okta is only breaching the $1 billion revenue mark this year, there’s lots of blue ocean growth to be had for all players in the CIAM space. Okta’s recent acquisition of a key competitor only increases their leadership, and perhaps future dominance, in CIAM.

An Okta Stock Forecast

Wall Street analysts always try to procure price targets for a stock in the future, an act that’s completely futile. The better way to forecast the performance of a given stock is by taking a more holistic look. If you have a large TAM ($80 billion in this case), and you can identify the market leader (Okta is a leader, if not the leader) then it’s reasonable to expect that growth will continue into the future. As the leaders pull out further in front, economies of scale help ensure they won’t be eroded by newcomers.

The ability to grow through acquisition increases with size as well. Paying less attention to earnings and short-term stock price movements and more attention to annual revenue growth (along with key SaaS metrics) means you can check in about once a year to make sure things are on track. It’s a real benefit to investing in larger SaaS companies. Set it and forget it. If anything goes pear-shaped, private equity firms will step in to support the share price.

In our previous piece on ForgeRock, we talked about how Okta was richly valued when compared to some of its peers. That hasn’t changed much. (Company names link to past research pieces.)

CompanyMarket Cap
(USD billions)
Revenue DataAnnualized Revs
(USD billions)
Simple Valuation Ratio
Darktrace $4.432Q-2021$0.4111
CrowdStrike $52.613Q-2021$1.3539
SentinelOne  $15.453Q-2021$0.1884
Fortinet $53.852Q-2021$3.4716
Palo Alto Networks $52.883Q-2021$5.0011
KnowBe4 $3.823Q-2021$0.2615
Okta $33.963Q-2021$1.2627
ForgeRock $2.393Q-2021$0.1814

After a recent dip, Okta shares are now down -7% over the past year compared to a +44.5% return for the Global X Cybersecurity ETF (BUG). As everyone complains about the languishing share price, astute investors would see this as a good thing. Okta has acquired one of their competitors – also a leader in CIAM – and the market hasn’t rewarded them for it. With Okta’s Fiscal Q3-2022 results to be announced next week, expect more volatility. Hopefully, that will be on the downside, so prospective investors can pick up Okta shares at a discount.

The tendency for Wall Street analysts to focus on profit creates a lot of short-term volatility when an investment like Okta needs at least a decade or so to mature – like a fine Opus One. As long as new customers keep climbing on board, and existing customers keep spending more, you can be sure that the stock price will continue appreciating accordingly, volatile as it may be. Below are some key metrics to watch to ensure customer growth is happening as time goes on.

key metrics to watch for Okta to ensure customer growth is happening as time goes on. Credit: Okta
Credit: Okta

Should You Buy Okta Stock?

Everyone needs to make investing decisions based on their own convictions. And you certainly shouldn’t be taking investment advice from anyone who doesn’t have to live with the consequences. We eat our own dog food around here by investing our own assets in tech stocks we love. We’re currently holding 34 assets in our disruptive tech stock portfolio, three of which are ETFs. (We’re presently considering a hard stop at 36 assets.) If we were to replace an ETF with a stock, it would be easy enough to measure the success of that decision.

If we decide to sell our cybersecurity ETF and go long Okta stock, we can simply benchmark the ETF performance against Okta’s performance over time. Then, we can determine how good a decision that was. If we decide that Okta stock is a good substitute for our current cybersecurity ETF holding, Nanalyze Premium subscribers will be the first to know.

Conclusion

When a dominant leader in an $80 billion blue ocean TAM has only captured around $1 billion, we see this as a long-term growth opportunity that’s more compelling than holding a basket of stocks. If 80% of hacking-related breaches involve bad actors within a network, it makes sense that the winning approach over the long term will be to focus on what’s happening inside an organization. Okta’s market leadership, fair valuation, and solid SaaS metrics make it a very compelling way to play the growth of cybersecurity in the coming decade.

Want to know what 30 tech stocks we own right now? Want to know which ones we think are too risky to hold? Become a Nanalyze Premium member and find out today!

2 thoughts on “Okta Stock Forecast: Growth with a Chance of Dominance
  1. How come do you consider Okta a ‘dominant leader’? Palo Alto’s revenues are 5 times higher and Fortinet’s more then 3 times?
    Do they compete on the same cybersecurity space?
    Palo Alto looks cheaper too.
    Thanks
    Best

    1. Please see the Magic Quadrant referenced in this article.

      The term cybersecurity encompasses a broad set of functional areas. Okta operates in customer identity and access management with a focus on “zero trust” which is where the industry appears to be heading. Trust nobody, even those already authenticated within your network. Here’s a piece we did looking at the largest cybersecurity stocks, Palo Alto and Fortinet being two of them: https://nanalyze.com/2021/04/biggest-cybersecurity-stocks-best/

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