Okta (NASDAQ:OKTA) did it again. Its fiscal 2020 fourth-quarter earnings results (12 months ended Jan. 31, 2020) came in higher than what was forecast just a few months ago. Though the stock has been beaten up along with nearly everything else during the novel coronavirus outbreak and oil industry-fueled stock market rout, the high growth stock has fared far better than average. Shares are flat so far in 2020 compared with a 16.1% year-to-date loss for the S&P 500.  

That surely makes Okta a buy then, right? Personally, I'm still on hold. Even with shares pulling back from all-time highs and business growing at a torrid pace, Okta still trades for a hefty premium.

Expensive when looking backward

Okta and its cloud-based identity security software continued to grow at a rapid pace last year. CEO Todd McKinnon said that three primary factors are contributing to Okta's success: Continued growth of cloud-based computing, organizations using the cloud to make digital transformation, and a heightened digital security risk that results from the transition. As to the last point, McKinnon said 70% of data breaches are due to compromised login credentials, so there has been plenty of demand for Okta's service.  

The result last year was a 41% increase in the number of customers spending over $100,000 annually. That led to big revenue gains, and the first year the company has been free cash flow positive since going public.  

Metric

Fiscal 2020

Fiscal 2019

Change

Revenue

$586 million

$399 million

47%

Gross profit margin

72.8%

71.6%

1.2 pp

Operating expenses

$613 million

$405 million

51%

Net income (loss)

($209 million)

($125 million)

N/A

Free cash flow

$36.3 million

($6.8 million)

N/A

Pp = percentage point. Data source: Okta.  

But here's the rub: Unadjusted earnings are still deep in the negative (although a big reason for that was a whopping $127 million paid out to employees in stock-based compensation), and free cash flow is too little to provide any meaningful valuation metric. Investors are left with the price-to-sales ratio, which, based on last year's overall sales, currently pegs shares at 23.2 times revenue. That's a steep price tag, even for a company growing at the rate Okta is.  

Someone in the background pressing an illustrated lock in the foreground

Image source: Getty Images.

Better, but still high-priced, when looking forward

There is a big runway of growth ahead for Okta, which at least partly explains the high premium. After all, management said to expect $770 million to $780 million in revenue in fiscal 2021, implying a 32% growth rate at the midpoint of guidance. Final results could be much higher as management has made a habit of under-promising and over-delivering.  

Still, based on that outlook, the price-to-sales ratio only gets reduced to 18.4 times forward revenue -- still a premium to be sure. At these levels, investors are pricing in at least a couple years of big double-digit sales upside. Okta also expects to be free cash flow positive again this year, but it will continue using cash to reinvest back into the business. This is very much a growth-now, profit-later enterprise.  

Given the hefty price tag, Okta's slowing growth rate (assuming no huge upgrades to guidance), and the economic uncertainty the world can't seem to shake off, I'm holding off on making a purchase. Investors in it for the long haul should be just fine, and I'd urge those who want to buy the stock now to be ready to buy the inevitable dips.