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Okta Has a Lot to Prove This Week: Here Are 3 Things to Watch

By Danny Vena - Mar 3, 2020 at 6:15AM

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The digital-identity specialist has soared over the past year, but can it keep up its stellar growth?

Okta (OKTA 6.17%) continued its winning ways last year. Since going public in early 2017, the stock of the digital-identity and access-management specialist has soared more than 460%. A good chunk of those gains occurred in 2019, when the stock gained 80%. What makes that even more impressive is that those gains came on the heels of 149% growth in 2018.

The company has a lot to prove when it releases its fiscal 2020 fourth-quarter results after the market close on Thursday, March 5. Let's take a look at three important areas investors will be watching in the report.

A padlock with computer circuity projected on top of it and around it.

Image source: Getty Images.

1. Continued impressive revenue growth

One of the most important catalysts for Okta's impressive share gains last year was the company's continued strong top-line growth. This shows that as unauthorized intrusion in business computer systems becomes more prevalent, companies as flocking to its digital identity services.

Revenue was up 48% year over year for the first nine months of 2019 -- on top of 58% gains in 2018. There's little doubt that the frenetic pace of growth will eventually slow, but the deceleration has been gradual and the company continues to be impressive by any other measure.

For the fourth quarter, Okta is forecasting revenue in the range of $155 million to $156 million, which would represent year-over-year growth of about 35%, though management has a history of issuing conservative guidance. Analysts' consensus estimates reflect this reality, calling for revenue of $155.85 million, at the high end of Okta's range.

2. Strong customer gains and retention

Another factor that has fueled Okta's sharp rise has been the company's ability to attract and retain customers, which has backstopped its impressive revenue growth. In the third quarter, Okta added 400 new customers, bringing its total customer count to 7,400 -- an increase of 32% year over year. Providing an even greater boost are the growing number of enterprise-level clients, as Okta added 103 customers with contract values that exceed $100,000, bringing the total to 1,300, up 40%. More than half of these are from newly signed companies, which illustrates Okta's growing traction with enterprise businesses.

Once customers sign with Okta, they not only stick around, but they tend to spend greater amounts of money. The company's dollar-based retention rate -- which measures increasing spending by its existing client base -- was 117% last quarter, a level it's exceeded each quarter since going public.

3. Profits will remain elusive

You have to spend money to make money, or so the old saying goes. Okta has consistently chosen to forego current profits in order to expand its business, as it looks to capture more of its large addressable market, and that's not likely to change in the current quarter.

On the Q3 conference call, CFO Bill Losch outlined the strategy: "Our strategic investment priorities continue to be driving business with the world's largest organizations, strengthening the network effects of our platform, expanding our presence with Customer Identity, investing in security and expanding geographically." Losch went on to point out that the biggest component of Okta's spending would be scaling the headcount to support these initiatives. 

Okta is forecasting a non-GAAP net loss per share of $0.05 to $0.04, consistent with the $0.04 loss per share it reported in the prior-year quarter. Wall Street is firmly in management's camp, with analysts' consensus estimates calling for an adjusted loss per share of $0.05.

A word on valuation

Similar to many other high-growth, software as a service (SaaS) companies, Okta is by no means cheap. The stock is currently trading at more than 22 times sales and an only slightly more reasonable 20 times forward valuation. Shareholders have thus far been willing to pay up for Okta's impressive top-line growth, which was nearly 45% in the most recent quarter. The stock soared 80% in 2019, so the expectations for its continued growth are evident. That means that even a small miss in the earnings report -- particularly in the current volatile market environment -- could result in a plummeting stock price.

That said, it's important for investors to resist the urge to be tempted by Wall Street's short-term mindset. Okta has impressive long-term prospects, and that's where shareholder focus should remain.

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