Do you ever get stressed out about having to remember passwords, integrating your health and business information or organizing your employee information? Okta Inc. (OKTA, Financial), a leader and innovator in the identity and access management (IAM) field, is working to eliminate that stress.
Okta’s offerings provide a suite of products for businesses looking to secure and streamline their private information. The company’s cloud-based software as a service is one such offering. It is a special offering because it allows a user to create a profile that can then interface with other programs the company chooses to use or partner with.
Unlike some of its competitors, such as Microsoft (MSFT, Financial), which encourages companies to use their entire suite of offerings, Okta has a more flexible pitch. With Okta, everything can be centralized, is easy to change and is, most importantly, protected. That flexibility may make the company a force to be reckoned with in the years ahead.
Financial performance
Okta’s past financial performance shows a company very much in a growth phase. Revenue has expanded rapidly, rising almost 500% in just over two years, from $40 million in 2015 to over $200 million in 2017, with early signs indicating 2018 should even stronger.
Net income is not a bright spot, coming in at over a $80 million loss for the year; however, executives view the high expenditures, especially on sales and marketing, as bets they can turn money spent into money gained many times over. It remains to be seen if marketing can rapidly increase Okta’s sales and justify the short-term losses, but it is obviously the case that growth to the necessary scale and scope will not be possible without heavy spending during its growth phase.
Earnings show a glimmer of things starting to pay off. While still negative, earnings per share in the fourth quarter of 2017 beat the consensus estimate by 12.8%. However, that came off the back of a quarter in which earnings missed by 11.5%. The rebound in the fourth quarter is a welcome sign, but whether the trend will hold remains to be seen.
Growing player in an expanding field
Okta has strong growth prospects for the future. The most striking figure is revenue growth. A two-year increase of almost 500% cannot be ignored and, if that trend continues, Okta’s investors could benefit handsomely.
Market research from Gartner and other sources indicates the IAM industry will continue to grow at speed. By 2022, spending in the sector could exceed $20 billion. And, Okta only represents a small share of the total IAM market. But with its new leadership role, it looks to take a larger chunk in the coming years. Even a fraction of a $20 billion market is highly valuable.
There are also promising indications that Okta is looking to expand beyond its current business model. Okta is already looking at the e-commerce space, as its purchase of Stormpath indicates. Customer identity and access management (CIAM), a subclass of IAM offerings, could prove very attractive to retailers, restaurants and other brands. This could be a game-changing offering, helping to streamline the shopping experience, securing user information and even assisting in marketing. Market research indicates this space could grow by as much as 200% in the next couple years.
It’s not all positive
There is a flipside to every coin, especially when we are talking about a disruptive upstart company. Cash burn and competition represent the two principal challenges for Okta going forward. The company is spending a lot to gain customers and establish itself in the market as a leader in IAM. That is costly, and has kept Okta in the red. It may prove challenging to transform growing revenues into growing profits.
That is especially true when we consider the second challenge, competition. Large, established companies and startups alike have been piling into the IAM business. Okta may be a small leader in the space, but one must put emphasis on “small.” It is competing against internet giants like Microsoft, and must ensure it continues to differentiate itself in the industry through unique offerings.
Verdict
Okta clearly has a lot of potential. As the industry continues to grow and Okta gets its proverbial sea legs, it is reasonable to anticipate a transition into a profitable enterprise.
Right now, especially with this month’s stock selloff, Okta may be in bargain territory under $28 a share. While we have less than a year of public company performance to go by, Okta has had a fairly stable price range since its initial public offering.
It’s definitely a growth stock play. But as high-flying tech stocks go, Okta looks like a pretty good deal.
Disclosure: I/We own no stocks mentioned in this article.
