Okta: What to Make of Profitability Concerns

Okta (OKTA) is an identity management platform provider in the United States and internationally. The company provides solutions like Single Sign-On and multi-factor identification for small- and medium-sized enterprises. The company has been public since 2017.

The company enjoys secular tailwinds given the focus on cybersecurity. Businesses of all sizes will likely increase their budgets for security as bad actors become more brazen. Despite this, the stock has struggled recently as profitability proves elusive.

I am neutral on OKTA stock. (See Analysts’ Top Stocks on TipRanks)

Okta’s Meets Resistance

Since its IPO in 2017 Okta stock has gained over 800%. An investment of $10,000 would be worth over $90,000 today. Recently, however, investors are souring on the name. This is likely due to several factors.

First, the Federal Reserve has signaled that interest rate hikes may come sooner than previously expected. This has caused a downturn in growth stocks. Next, while revenue growth appears strong, it is coming through acquisitions, and not strictly organically. Finally, the valuation after the amazing run-up may have gotten far ahead of the fundamentals.

Okta stock is currently down 14.4% year-to-date and is over 27% off its 52-week high.

Revenue Gains

Okta has gone from a company with less than $50 million in revenue in 2015 to $1.28 billion predicted for the year ended January 31, 2022. The recent acquisition of Auth0 has contributed to this total.

The increased revenue has not caused improved margins unfortunately. The gross margin over the last 12 months is 72%, which is down slightly from the fiscal 2021 gross margin of 74%. Operating margin stands at a -42% over the past 12 months.

In fact, the company has lost more money from operations over each of the last five fiscal years. This is a sign that scaling to profits may be difficult.

Given the recent stock price pullback, it seems investors are becoming wary of the increasing losses. Earnings per share have also struggled. Over the last 12 months the company has lost $3.94 per diluted share, significantly down from the $2.09 loss in fiscal 2021.

This is a sign that growth is coming at a great cost to the company, namely in sales and marketing expenses, and expenses related to acquisitions.

Valuation

Growing revenue through acquisitions can have devastating effects on the balance sheet of a company. Okta reported no long-term debt at the end of fiscal 2019. Then in 2020 more than $830 million was added. This figure has now ballooned to over $1.7 billion at last report.

As the balance sheet deteriorates, the valuation remains high even after the recent pullback. The company is trading at a P/S ratio of 26.4 and a forward P/S ratio of 20.6. With no clear path to profitability, or even a noticeable path to positive EBITDA, this is a serious concern for investors.

Wall Street’s Analysis

Turning to Wall Street, analysts give Okta a Moderate Buy consensus rating. This is based on nine analysts who have Buy ratings and five who have Hold ratings.

The average Okta price target of $270.38 implies 25.4% upside from the current price.

Conclusion

Okta has performed magnificently since going public in 2017. Those who invested early have been richly rewarded. The company offers a product that is in demand given the secular tailwinds for cybersecurity.

Still, profits are more elusive than ever. There is also a concern that the recent growth is more about acquisitions than organically created. This has led to a less attractive balance sheet. The valuation metrics are still very high even after the recent drop, and investors should exercise caution with this stock.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.