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OKTA stock went public in April of 2017, and has returned over 1,000% to investors since. I am neutral on the stock. (See OKTA stock charts on TipRanks)
Impressive Growth in Several Areas
A key indicator for software-as-a-service (SaaS) stocks is the number of subscription customers. These customers provide recurring revenues, and offer the company opportunities for growth through upselling, and additional product adoption.
Okta has grown its subscription customer base by a compound annual growth rate (CAGR) of nearly 10% each quarter since January 2020. As of the last reporting period, the quarter ending July 31, 2021, the company’s customer base was up 50% over the same quarter in the previous year.
The recent quarter customer increase was aided significantly by May’s acquisition of Auth0.
Quarterly revenues have increased substantially, along with the customer base. Revenue for Q2 of Fiscal Year 2022 was $316 million, which is a 57% increase over the same quarter of the prior year.
The company is spending this revenue heavily on customer acquisition costs. This is typical of a company in this stage, where heavy spending on sales and marketing will facilitate large returns later from recurring revenues.
For this reason, the company is not profitable, and will likely not be for several years. Okta also has over $1.7 billion in long-term debt on the balance sheet, partially due to recent acquisitions.
On a positive note, Okta is generating positive cash from operations over the previous 10 quarters. The company’s gross profit margin is in the 70% range, so as the customer base becomes established and the sales and marketing spend normalizes, profitability should follow.
Okta Acquires Auth0
Okta recently acquired Auth0 to broaden the company’s authentication and authorization services.
The two companies are a natural fit, as they are both leaders in access management. Auth0 also has an existing and loyal customer base, which is a major positive for Okta.
Auth0 will become its own segment under the Okta umbrella. It will also keep its current CEO as head of the new segment. The Auth0 acquisition accounted for over 2,000 of the new customers that Okta acquired last quarter.
This is somewhat concerning, as organic subscription customer growth was only 750 new customers. As of now, the payback period for customers acquired is longer than desirable.
Analysts Bullish on OKTA Stock
On Wall Street, analysts are bullish on OKTA stock. Of the 18 analyst ratings reported by TipRanks, 13 have rated the stock a Buy and five have a Hold rating on the stock.
The average OKTA price target is $291.78. This target implies a near-term upside of 9.6%. Not everyone is bullish, however, as the stock has over 4% of the float sold short. It will be critical for the company to grow its organic customer base more efficiently, and pay down debt, in order to grow into its valuation.
Okta Stock Summary
Okta, Inc. has performed wonderfully for investors since its 2017 IPO. The company is growing its customer base and recurring revenues significantly.
The acquisition of Auth0 provides another set of subscription customers, and broadens the company’s offering. The valuation may be somewhat extended currently, as analyst price targets do not imply much near-term growth.
Future success from this price will depend on management’s ability to efficiently increase subscription customers, and improve the balance sheet.
Disclosure: At the time of publication, Bradley Guichard did not have a position in any of the securities mentioned in this article.
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