In the realm of cybersecurity, identity management services are only becoming more vital for businesses, and Okta (NASDAQ:OKTA) is one of the leading providers. Its shares have almost doubled in the past year as its client list and revenue have grown. But when it delivered its fourth-quarter results, there was a fly in the ointment. Despite a smaller-than-expected loss, it cut its guidance, and the market dinged the stock.
In this segment from Motley Fool Money, host Chris Hill and senior analysts Andy Cross, Ron Gross, and Jason Moser reflect on Okta, the heavy investments it's making into growth and technology, its financials, and whether or not the share price had gotten ahead of itself.
A full transcript follows the video.
This video was recorded on March 8, 2019.
Chris Hill: Okta's loss in the fourth quarter was smaller than expected, but guidance for the first quarter was lower, and shares of Okta down 5% on Friday. Andy, you tell me, is this a speed bump? Shares of Okta are up about 80% over the past year.
Andy Cross: I don't know if it's a speed bump. They're certainly investing a lot into the platform. That's worked exceptionally well. Just look at the quarter results for the fourth quarter. Revenue was up 50%. Subscription growth of 53%. They ended with 6,100 clients, that's up 40% for the year. They generated some free cash flow during the quarter, which was really nice to see.
When I think about the balance between growing their revenues and adding to the cost structure to be able to grow those revenues, there's maybe some concerns from the analyst community, trying to think about how that balance may work out. The guidance for the year was certainly slower growth than we've seen over the past couple of years, which had been north of 50%. Now, they're looking more in the 40% range. But they'll continue to invest more and more in research and development, more and more in their sales cycle as they continue to try to grow the business. They now have more than 1,000 clients that generate more than $100,000 billion [actually, $100,000] per year. That's about 70% of the total they have. The more they can add to the larger clients, the better it is for profits and for cash flow.
The Okta story continues to be in play. It's a business that, as we continue to expand and use more and more applications, all of us globally, we're going to need identity management systems to be able to integrate all those applications, and Okta's a leader in that space.
Hill: Obviously, a 5% drop, not as bad as a 25% drop, but to the point that Jason made about Eventbrite, do you look at Okta and think this is a stock that's a little pricey?
Cross: Well, it's a little less pricey now. They used to sell higher than 10 times revenues. Now they sell more like the eight, nine range. It's a healthy growth story, and maybe the pricing, at times, is ahead of itself. Certainly, shareholders have to be ready for the volatility that any company selling at those levels will come with.