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Is Okta a Buy?

By Jeremy Bowman – Dec 2, 2018 at 8:48AM

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The high-flying cloud stock has already delivered some impressive returns. Is now the time to buy?

Cloud-computing stocks have surged this year as investors have funneled money into fast-growing software-as-a-service providers that offer scalability and an appealing growth opportunity. Among the big winners this year is Okta (OKTA 1.15%), which is up 113% so far this year after the stock was up nearly 200% for the year following its second-quarter earnings report in September.

Okta calls itself the leading provider of identity for the enterprise. The company provides tools and services that allow businesses, employees, customers, and contractors to securely access information on the web, in mobile applications, and in cloud applications. Okta handles things like password verification and two-factor authentication that help businesses seamlessly and securely connect, based in the Okta Identity Cloud, which allows clients to easily scale up once they start working with Okta. 

Three employees in the Okta break room.

Image source: Okta.

Founded in 2009, Okta had its IPO last April. However, the company has put up better-than-expected numbers nearly every quarter since then, and as a result the stock has skyrocketed, jumping 132% since its IPO and 113% year to date. The chart below shows its performance year to date.

OKTA Chart

OKTA data by YCharts.

After that huge run, investors may be wondering if Okta is still a buy. Let's take a look at the buy and sell arguments for the fast-growing cloud stock to determine if it's worth investing in today.

The buy case 

Perhaps the biggest reason for Okta's surge this year -- and the best argument for investing in the stock -- is that the company has made a habit of topping its own guidance, showing the strong demand for its services. In its most recent quarter, revenue jumped 57% to $94.6 million, easily beating the company's own forecast of $84 million to $85 million in revenue. Okta's growth was driven by new customers embracing the Okta Identity Cloud, and older ones expanding their relationship. In the earnings report, CEO Todd McKinnon said that customers generating more than $100,000 in annual recurring revenue increased by 55%, an acceleration from the prior quarter. 

Okta has successfully recruited a wide range of customers, including JetBlue, Nordstrom, and Slack, as well as more than 5,000 others, and has expanded relationships with companies like Twenty-First Century Fox and BOK Financial. Beyond its current momentum, the need for security and identity services as companies seek to protect themselves from hacks and data breaches should continue to proliferate, and the scalability of the platform should also help the company deliver growth while improving the bottom line.

Okta is still operating at a loss, but its margin has improved in recent quarters, and the company is expecting to reach its break-even point on a free cash flow basis by the end of the year. In its most recent quarter, adjusted loss per share of $0.15 was even with the year before, even as revenue surged.   

Or maybe wait 

The sell-off in Okta shares since the September earnings report, along with the slide in the broader tech sector, is a signal that the market believes that the stock may have gotten too frothy, and with interest rates rising and the market seemingly turning against growth stocks, the stock could continue to slide.

It's easy to see why. Okta trades at a whopping price-to-sales ratio of 18.5, higher than nearly all of its cloud-based peers. It's hard for almost any stock to justify a valuation like that, especially one that doesn't have any profits to speak of. If its next quarterly report misses the mark, or the company fails to make progress toward profitability, the stock could have a long way to fall.

Okta also spends more than half of its revenue on sales and marketing, a common strategy with growth stocks, but that's a sign the growth could slow without the marketing investment or that the company could struggle to deliver growth and profitability at the same time. 

What's the call?

Whether or not Okta is a buy will be determined in part by your own investing style. Risk-averse investors will likely want to avoid the stock, as profitless, high-priced stocks should continue to be volatile, and fall considerably from this current point. On a similar note, Okta may not be the best stock for retirees looking for wealth preservation or income. But for growth investors with some risk appetite, it looks like a smart bet.

Okta is the leader in a fast-growing space with a long tail ahead of it, and it strengthened its position in the industry with the acquisition earlier this year of ScaleFT, a zero trust security company.

Okta investors are likely to see some volatility ahead, but this is the kind of stock that could easily be a multibagger in a few years. If you can stomach the risk, it's worth hitting the buy button.

Jeremy Bowman owns shares of Okta. The Motley Fool owns shares of and recommends Okta. The Motley Fool recommends JetBlue Airways and Nordstrom. The Motley Fool has a disclosure policy.

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