Cybersecurity is a massive and increasingly vital industry. Businesses that help organizations defend against hackers, scammers, and cyberattacks are expected to generate $300 billion in annual sales by 2024, according to Global Market Insights, up from $120 billion in 2017.
One of the fastest-growing segments within this enormous market is known as IAAM, which stands for identity, authentication, and access management. And few businesses are better positioned to benefit from the surging demand for IAAM solutions than Okta (OKTA +0.46%).
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Okta helps an organization's employees, contractors, and customers securely access cloud-based applications from all manner of connected devices. It offers a single sign-on platform that makes it easier and faster for people to securely log in to more than 6,000 apps, including Microsoft Office, a host of Google apps, and Salesforce's cloud services. In this way, Okta strengthens organizations' cyberdefenses while also making their operations more efficient.
Okta is expanding its client base at a rapid clip. It added 450 customers in the second quarter, bringing its total customer count to more than 7,000. And once an organization becomes a customer, it tends to purchase more of Okta's services over time. This is reflected in the company's dollar-based retention rate, which came in at 118% in the second quarter and 120% or more over the past five years.
This powerful formula of adding new customers and selling existing customers more services is helping to drive Okta's sales sharply higher. Revenue surged 49% year over year to $140.5 million in Q2, with subscription revenue rising 51%. Meanwhile, Okta's remaining performance obligation, which represents contracted revenue that has not yet been recognized, soared 68% to $913.6 million.
"Our momentum is powered by the massive and inevitable shifts that are enveloping companies today: the rapid growth of cloud and hybrid IT, digital transformation, and security," CEO Todd McKinnon said during the company's earnings call. "Identity plays a critical role in each of these megatrends, and organizations are turning to Okta because we are uniquely able to address the broadest set of use cases across even the most complex technology environments."
Risky, but improving
While its growth is impressive, investors should note that Okta is not yet profitable. However, it is making significant progress in this regard. Okta generated a Q2 adjusted (non-GAAP) operating loss of $9.9 million, or 7.1% of revenue, compared to $19.2 million, or 20.3% of revenue, in the prior-year period.
Okta's stock is also priced at a premium. Shares currently trade for more than 26 times sales. That's pretty steep, even for a company that's projected to grow sales by more than 40% this year and 30% next year.
So is Okta a buy?
Despite its lofty valuation, I'd argue that Okta stock is a buy. The company has a strong competitive position in a massive, high-growth industry, which should allow it to grow its revenue at impressive rates for many years to come. Its software subscription model should also help it scale its profits over time, and I expect Okta will eventually produce bountiful free cash flow.
Moreover, its current $12.5 billion market capitalization likely underrates its long-term market opportunity. As such, investors may wish to buy some shares today, and then look for opportunities to add to their positions if better valuations materialize in the future.
