In the age of cloud computing, verifying a person's identity is paramount. Mountains of highly sensitive data are stored on servers throughout the world, and if the wrong eyes end up seeing that data, there can be serious consequences.
That's where Okta (OKTA 1.52%) comes into play. Last month I bought shares of the company because I believe its Software-as-a-Service (SaaS) business model and track record of helping manage identity make it a compelling investment. These five reasons dig deeper into why that's the case.
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1. Incredible growth
One of the quickest ways to see that companies are excited about what Okta is offering up is to peek at the company's growth. As you can see, its customer rosters are swelling.
Chart by author. Data source: SEC filings. $100K+ customers for 2014 not available.
Just as important as the growth in total customers, the number of those with annual contract values (ACVs) of over $100,000 has jumped even faster. Over the last four years, the total number of such clients has grown by 60% per year.
What happens when you attract so many customers and they spend so much money with you? Subscription revenue growth that looks like this:
Chart by author. Data source: SEC filings.
2. Two widening moats
None of this growth, however, would be worth it for investors if we didn't know Okta could protect its business over the long-haul. That's where evaluating the company's moat comes into play.
Okta's most powerful moat is high switching costs. Over time, Okta's customers come to rely on the service to provide identity and access to information services; entire company workforces are streamlined through the system, as well as digital services' customers. When companies have gotten familiar with Okta and come to rely on it to solve all of these problems, they aren't too excited about switching. Not only would leaving Okta be expensive (think of all the data to migrate!), it would also be a headache. There'd be a lot of relearning and trouble-shooting along the way. No one wants to deal with that.
We can see if those high switching costs are working by viewing Okta's dollar-based retention rate (DBRR). This measures the amount of subscription revenue the same cohort of companies pay year after year. If the DBRR is at or near 100%, that's a sign customers are staying with Okta -- and it has high switching costs. If they are well above that figure, the moat is widening.
| 2014 | 2015 | 2016 | 2017 | 2018 | |
| DBRR | 129% | 120% | 123% | 121% | 120% |
Data source: SEC filings.
The results speak for themselves: The moat is widening.
But that's not all: The company is also benefiting from a burgeoning network effect, meaning that each additional user of Okta makes the overall service more valuable. At first glance, that might seem odd: How do I, as an Okta client, benefit from another company using Okta? The answer has to do with artificial intelligence and machine learning (AI/ML).
Okta has something called "progressive user profiling." This means using lots of data to ensure that someone is who they say they are. It has two new tools, Hooks and ThreatInsight, that use AI/ML to do this. The more data Okta can feed into its systems, the more superior its technology is, giving it a notable competitive edge.
3. Lots of optionality
Here's Okta's mission statement: "to enable any company to use technology."
Notice that the words "identity" and "access" weren't included anywhere in there. These two have been the bread and butter thus far, but management has much bigger ambitions.
Okta truly wants to be a hub that allows any company to use the cloud. Some recent examples:
- The aforementioned Hooks product has just as much to do with customer relationship management (CRM) as it does identification and access, allowing for deeper integration.
- The company acquired Azuqua last year. With it Okta can now offer a tool that allows users to work through several different apps without having to provide credentials at each step.
The bottom line is that we're likely still scratching the surface of what Okta will be offering. As it collects more data and tests more products, don't be surprised to see sales continue their impressive growth.
4. Skin in the game
I'm a big believer in founder-led companies, where insiders own lots of stock -- meaning they have skin in the game -- and employees are generally happy. Founders are intrinsically motivated to build something with lasting value, and when insiders own a company's stock their financial interests are aligned with my own. And when employees are happy, they do good work.
Okta checks off all three boxes:
- Todd McKinnon (CEO) and Frederic Kerrest (COO) co-founded the company, are both still in the C-Suite, and sit on the company's board.
- Insiders combined own 13.9% of shares outstanding, and control 54.7% of voting rights.
- Anonymous employee reviews on Glassdoor.com give Okta 4.1 stars out of 5, with McKinnon garnering a 91% approval rating.
5. Financial fortitude
Finally, it's important to monitor whether or not Okta can fund all of the ambitions it has going forward. The company currently has over $560 million in cash and investments and no long-term debt. To put that number in context, over the past year, Okta lost about $125 million.
I'm comfortable with the balance sheet overall, as it offers flexibility and the chance to invest in growth when the opportunity presents itself.
Why I like Okta
No one would argue that Okta is a "cheap" stock. It's not profitable, and already valued at over $12 billion. The company will be reporting earnings later this week, and I wouldn't be surprised if it moves up or down by a large margin.
But long-term investors need to remain focused on the big picture highlighted by the five points above. As long as they're all intact, Okta is a stock worth buying and holding for the long haul.
