Investment Thesis

Okta (OKTA) is the leading identity management platform. It has reported astonishing growth rates and the stock has rapidly repriced higher as investors came to understand its full potential.

However, I question whether investors now are not already fully pricing its upside, and then some, as the stock is already priced for 30x its fiscal 2022 revenues.

Companies valued at 30x forward sales need nothing but positive news on the horizon; and I question whether that is indeed the case here with Okta’s near-term horizon.

Revenue Growth Rates Are Strong, But There’s More Here Than Meets the Eye

During a recent analyst conference call, Okta’s Executive Vice Chairman and co-founder of Okta proclaimed:

As everything moves online, as more and more people are focused on software, you certainly don’t want it to be on the front page of The Wall Street Journal for all the wrong reasons and the acceleration in people working from home, phishing attacks, multi factor authentication, those are all big drivers to our business as well.

On the surface, there’s enough of an element of truth to sound plausible. However, the facts don’t back up that narrative:

Source: author’s work

In approximately a week’s time, Okta will report its highly anticipated Q3 2021 result.

At which time, we’ll see just how significantly Okta raises its Q4 2021 revenues. Because for now, investors have bought into that illusion that the pandemic has meaningfully accelerated Otka’s prospects:

Source: author’s calculations

However, what I see is quite the opposite. I see that Oktra’s revenue growth rates in fiscal 2020 (last year’s) marked the high rate for Okta at more than 46% y/y revenue growth rates, but that as Okta continues throughout fiscal 2021, its revenue growth rates are now dipping lower.

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Indeed, as we look above, analysts following the stock are largely expecting Okta’s revenue growth rates to hover around 30%-33% (red box above), reinforcing that Okta’s revenue growth pull forward may be leaving in a gap behind.

Bullish Thesis: Digital Acceleration is Here to Stay, no Looking Back

The shift from a network-based security model to a Zero Trust security model is now the new normal. We are certainly not going back towards the mass adoption of network-based on-prem security. Realistically, there’s an unstoppable trend towards a cloud-only world. My only question to investors is how much of that is already being priced in here?

Furthermore, is it not the case that investors are pricing in the near-term future as continuing to see the pace of migration we have recently become accustomed to? Put simply, are investors guilty of extrapolating the recent past?

The issue I’m seeing right now is that for many companies, there has been a rapid and costly shift towards a digital acceleration. But many companies are trying to adapt to the brave new digital world, and are mostly focused on sales, rather than the adoption of tools that would bring with them enhanced security.

Indeed, the comments we recently saw from Microsoft (MSFT), as well as very recent results from Workday (NASDAQ:WDAY), with both enterprises arguing that macro uncertainty over the next several months is creating a headwind to their top-line growth rates and backs up my bearish thesis.

Valuation — At This Multiple, You Can’t Have Bad News Lingering Around

The issue that investors are facing is this discrepancy between the first half of calendar 2020 and the second half. If during the March/April sell-off all stocks got hit hard, it was tech names that rapidly bounced back. However, the theme we have seen during this Q3 earnings season is that tech is not fully immune to the underlying economy.

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Furthermore, even within tech, I can see enough evidence that investors are starting to be slightly discerning and that valuations are ever-so-slightly starting to matter once again.

In fact, just last week we saw Workday sell-off despite it raising its subscription revenue guidance. This reminds investors that investors are quite content to pay large premiums for SaaS stocks, but they need more than just meeting expectations, or even beating expectations. Investors are paying a large premium for SaaS stocks and hoping to be positively surprised on the upside.

Here’s some back of the envelope assumptions. Let’s say that Okta has an impressive finish to fiscal 2021 where its revenues finish at $805 million. Then, let’s further assume that its guidance for fiscal 2022 points towards a 30% appreciation y/y, this would imply that Okta’s fiscal 2022 revenue would reach approximately $1.05 billion — thus crossing into the impressive $1 billion revenue mark.

On that basis, investors are already paying 30x its fiscal 2022 revenues. Indeed, now investors are left with a minor problem. Not only are investors facing quite clear revenue growth deceleration, but a potentially more important question I push is: just how content will investors be to pay a huge premium for a SaaS company that is eyeing up just 30% revenue growth rates?

The Bottom Line

Looking back to Okta’s year-to-date performance and long-term investors should have nothing but warm fuzzy feelings towards the stock. At any point that naysayers, such as myself, have argued that the stock is fully priced, the stock has pushed ahead to new highs.

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However, there are enough rumblings in tech starting to emerge for me to question whether the path towards continual digital acceleration will be as smooth as many investors hope for, or whether there’s actually been a meaningful pull forward, but now that’s done, there’s some unexpected slow down up ahead.

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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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