Okta Inc. (OKTA, Financial) is a cybersecurity leader in identity access management, or IDM, cloud software.
The stock had a major bull run in 2020, increasing by 122%. However, since November of last year, shares have slid 53% due to high inflation and a forecasted rise in interest rates, which has compressed the valuation of all growth stocks. Ironically, Okta also had a data breach in January, but customers didn’t find out about it until ransomware group Lapsus$ posted screenshots on its Telegram channel in March. This seriously damaged the credibility of the company, but the market may have overreacted. Let’s dive into the breach as well as the company's financials to determine if the stock is undervalued.
How bad was the hack?
According to David Bradbury, Okta’s chief security officer, on Jan. 21, a hacker “actively controlled” a single workstation which was used by a Sitel support engineer to access the company's resources. The control lasted for 25 minute and the hacker accessed two active customer tenants. This resulted in a breach of up to 366 customer accounts. Given the company has over 15,000 customers, this is less than 3% of its base. The company also reported the “technical impact was near zero” in terms of actions customers had to take, such as reporting and technical changes.
As a result, Morgan Stanley slashed their price target on the stock, but kept an overweight rating for the company. They noted, “The Data Breach would not materially impact the company’s revenue growth.”
Therefore, I believe the actual breach was not a major issue, but the company could have handled it much better. It does not give customers much confidence in a company to hear about a breach from an alternative source months later.
Megatrends
Despite the breach, Okta is poised to ride three megatrends in the industry: Hybrid IT, Cloud Transformation and Zero Trust Security. Improved online customer experience is also a major trend as people demand greater experiences and smooth authentication. Easy updates can help with this.
Cybersecurity spending is also on the rise. According to Cybersecurity Dive's Samantha Schwartz, cybersecurity spending currently only accounts for 5.7% of a corporate IT budget. However, data from Gatefy indicates spending is expected to increase to 10% to 15%.
Business model
Okta is a leader in identity management and ranks the highest on Gartner's Magic Quadrant. Identity management is about enabling secure and easy access for users while preventing unauthorized access from hackers. IT administrators can be burdened by a large number of repetitive tasks, but a platform like Okta, with its ease of use and fast onboarding, can free up time for higher value tasks.
Okta pioneered the single sign-on, or SSO, experience for workforces and has also entered the identity governance and administration and privileged access management industries to disrupt legacy incumbents such as Sailpoint Technologies (SAIL, Financial) and CyberArk Software (CYBR, Financial) with a cloud-based, SaaS alternative. The company also acquired Auth0 in 2021 for $6.5 billion in an all-stock transaction, which gives the company greater flexibility in the customer IAM industry.
Growing financials
Okta grew revenue from $835 million in 2020 to $1.3 billion by the end of 2021, up 55%. The gross profit has increased 46% to a high $903 million over the same period.
As a SaaS company, Okta has a super high gross margin of 69%, but is operating at a loss of $762 million for fiscal 2021.
The company spent $469 million on research and development and an eye-watering $1.2 billion on sales and administrative expenses. Thus, despite the operating loss, this is part of the company’s strategy for aggressive growth.
Okta has a strong balance sheet with $2.9 billion in cash and short-term investments and just $16 million in current debt. The long-term debt is quite high at $1.8 billion, but I suspect the company is using this for growth.
In terms of valuation, the company is trading at a price-sales ratio of 13, the lowest level since 2018. This is still higher than competitors such as Ping Identity (PING, Financial), IBM (IBM, Financial) and CyberArk Software, but I believe it reflects the company’s leading market position and best-in-class product.
The GF Value Line, which analyzes historic multiples, past financial performance and future earnings projections, also indicates the stock is undervalued, but does warn of a possible value trap, most likely due to the sharp decline.
Final thoughts
Okta is a leader in identity management and is poised to ride the megatrends of remote working and an increasing cloud environment. The data breach was an embarrissing moment for the company, but was very minimal from a technical standpoint and the number of customers affected. The company could have handled this better in terms of communication. The stock is not cheap at 13 times sales, but relative to historic multiples and forward growth potential it is very enticing.
