Okta: The Chrome Of Identity Management

Okta (OKTA) is a sustainable way to bet on the future of work. Its products are intuitive while addressing a broad swath of technical problems. Its platform offers solutions to avoid vendor lock-in worries in the identity management space. Its financials point to a solid growth factor and a convincing path to profitability. Profitability and free cash flow benefit from Okta’s solid competitive positioning and its ability to upsell its installed base. While valuation appears frothy, long-term investors will find Okta’s story attractive.

Demand (Bullish)

Global Reach-Identity Management-Cloud-ARR-DBNRR-RPO

Source: Okta

Okta offers identity and access management (IAM) solutions with a global reach. It plays in the IAM space alongside other top players like Ping Identity (PING) and Microsoft (MSFT). IAM is a blend of cloud digital transformation and security transformation solutions. As a result, there are multiple C-level execs making a case for its products. The CIO deploys Okta’s products for employee access control and identity management. The CTO deploys Okta’s solutions for customer access control and identity management. This is done when shipping new products or redesigning existing products alongside the Chief Product Officer. The CISO adopts Okta’s access security products as a part of his/her network security toolkit.

When you have multiple C-level execs adopting your products to push change within an organization, the sales motion is simple because Okta’s solutions simplify technical problems while cutting across multiple facets of the organization. Therefore, when Okta reported attractive growth metrics last quarter, the results weren’t farfetched. Revenue growth (guiding for 33% growth in Q2’21) will outperform due to the cloud-centric nature of its solutions. ARR (annual recurring revenue) and DBNRR (120%+) will grow due to ease of upselling as Okta’s product solve multiple problems for large organizations. Billings and RPO (remaining performance obligation) will also grow due to huge product stickiness driving long-term commitments.

Going forward, Okta’s growth factor will remain strong due to the favorable near-term tailwinds driven by the migration of more cloud workloads to cloud platforms. For a player recording huge growth in a fast-growing market, major growth worries mostly come from an indefensible moat. In rare cases, talent management costs can also pose a challenge.

Business/Financials (Neutral)

Platform-Margins-FCF-Liquidity

Okta’s identity cloud has helped it integrate and partner with other cloud platforms to accelerate the market penetration of its products. This is a function of the great usability of its products. Okta is just getting started with its product roadmap. Okta is growing the capabilities of its platform services. Platform services include new features to make Okta’s platform programmable. This includes Okta Workflows for enterprises to automate complex processes without code. Okta has also introduced FastPass for passwordless logins to improve the usability of enterprise apps.

Okta also announced partnerships with security players including VMware (VMW), Carbon Black (NASDAQ:CBLK), CrowdStrike (CRWD), and Tanium. For access management platforms, partnerships and integrations will be easy because cloud platforms don’t want to lose prospects due to their lack of support for a popular IAM provider. Essentially, Okta is like the Chrome of logins. Its integration network, currently, supports over 6,500 cloud, on-prem, and mobile apps.

Source: Author (using data from Seeking Alpha)

Okta’s financials are supported by the huge billings and RPO commitment from its customers. This improves operating cash flow (OCF) which is driven by deferred revenue. OCF is partly supported by non-cash expenses (SBC, D&A). As margins expand due to more upsell/cross-sell, Okta will attain its long-term cash flow guidance. As the chart above indicates, opex % of revenue has declined y/y. Okta will realize cost savings due to minimal physical business activities due to COVID-19. This will be mildly offset by lower interest revenue due to low-interest rates. Okta is tapping the debt market to shore up its cash reserve due to the low-interest-rate environment. This is a brilliant financing strategy to manage earnings volatility from future equity dilution.

Macro/Competitors (Bullish)

Partnerships-Integrations-International Expansion

It’s tough for any formidable competitor to accumulate the resources to compete with Okta on fine details like usability and platform evolution. Access and identity management is Okta’s bread and butter and it has acquired both the talent and technical capabilities to pull away from competitors. As long as it retains its talents while pushing for more go-to-market efficiency, Okta will be untouchable.

On the macro front, investors should expect more volatility from businesses impacted by COVID-19. This mostly impacts billings. They should normalize towards the back half of the year.

Investors/Valuation (Neutral)

Growth-Moat-Analysts-Momentum

Okta enjoys a combination of growth and valuation factors that are above its peers. This is a function of strong momentum and solid product adoption. The recent debt issuance indicates the market’s confidence in its growth story. The debt was issued at an annual interest rate of 0.375%. The conversion price was pegged at $232 (32.5% premium to the last reported share price). Given its attractive liquidity and strong competitive posture, mispricing will largely result from a weak macro environment forcing a sector correction. Given its elevated valuation ratios, investors with a short-term investment outlook should be careful in initiating new positions.

Risks

Source: Author

Demand-side risk factors aren’t much of a concern due to the fast adoption of its products. Execution risk isn’t a worry as long as Okta drives sales efficiency without losing its top sales managers. Financial risk factors are also less of a concern due to its ample cash reserve and growing FCF. Though this could be weakened during quarters with lower than expected billings growth.

Competitive worries are also minimal. The biggest risk factor will come from occasional sector corrections and momentum weaknesses.

Conclusion (Rating: Hold)

An exciting upsell in the quarter was T-Mobile. The company originally selected Okta to be its identity standard for building frontline applications and providing corporate, retail and customer care employees with seamless access to the tools and resources they need.

Demand-side tailwinds remain strong. Okta’s financials point to a convincing path to GAAP profitability due to its strong competitive positioning and ability to drive growth at a reduced margin by upselling its installed base. Investors should maintain a long-term strategy to fully profit from future multiple expansion. Short-term bets should be hedged due to the volatility inherent in cloud stocks.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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