As companies shifted their infrastructure to the cloud, security and user management became an essential requirement. This is where Okta (NASDAQ: OKTA) filled the gap with its cloud-based identity and access management software. The company has seen some great tailwinds from the pandemic but is up against some serious potential competition. Is Okta a good investment?

The bull case for Okta

With the pandemic forcing businesses to shift online, it quickly came to light that a secure account management solution was absolutely essential and this fact helped boost Okta's revenue and stock price this year. Thus far, Okta's revenue is up nearly 20% at $200 million as per the company's 2021 Q2 report and its stock is up more than 90% year-to-date (YTD). With the identity and access management market projected to reach a valuation of $30 billion by 2027, the company stands to benefit by offering a valuable, critical product to clients.

With 83% of Okta's clients reporting productivity boosts and many customers saving upwards of half a million dollars annually, it's little wonder that companies are demanding that any new products being deployed to the cloud are Okta-compliant. According to Needham analyst Alex Henderson, Okta's major competitive advantage is the vast number of applications (currently 6,500) integrated with Okta's network, its scale, and ease of use. These qualities have led Gartner to name the company a leader in its Magic Quadrant for Access Management for the last three years. 

As per its last quarterly report, Okta's remaining performance obligations (RPO), or backlog, is up 48% year-over-year (YoY) to $685 million and its dollar-based net retention rate is at 121%; additionally, the company grew its customer number nearly 30% YoY to 8,950. The cloud-agnostic, single sign-on (SSO) solution runs on a subscription model which represents over 90% of total revenue and gross margins of nearly 83%. 

The bear case for Okta

Let's put aside the fact that Okta is not (yet) profitable, the biggest threat to the company comes from potential competition from bigger and stronger companies like Microsoft and Amazon. In fact, both companies already offer solutions with Microsoft's Azure Active Directory (which currently holds at least twice Okta's market share) and Amazon's AWS SSO and these goliaths have the financial wherewithal to obliterate Okta. Yes, the pandemic gave the company a boost, but will it be able to sustain its growth next year when life is back to normal?

So, should I buy Okta Stock?

I feel Okta is a solid long-term investment, so yes. As for the company's profitability, analysts estimate that it's on track to green territory by 2024. Aside from its many accolades and positive reviews, Okta has another significant moat that its competitors lack: artificial intelligence and machine learning (AI/ML). Every additional user added to its network gives Okta more data to feed its systems and grow its user security and profiling capabilities. Additionally, switching costs are expensive not only financially, but operationally as well. With its high retention rate, it doesn't look like Okta is losing customers and is expected to have revenue totaling $2.43 billion by 2025.

Quickfire Round:

Does Okta pay dividends?

No, it does not as yet.

What are some of Okta's clients?

LinkedIn, HubSpot, and Groupon are among its nearly 9,000 clients. 

When did Okta go public?

April 7, 2017

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