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Don't Expect an Okta Merger

By Daniel Sparks - Dec 3, 2020 at 8:11AM

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The fast-growing tech company is likely better off on its own anyway.

Following Salesforce's announcement that it has agreed to acquire Slack Technologies, speculation mounted about other potential software-as-a-service companies that could fit well into a larger tech company. Could identity management specialist Okta ( OKTA 10.36% ) potentially get acquired? After all, like Slack, it has a sub-$30 billion market capitalization, making it a doable acquisition target for a megacap tech company such as Microsoft.

Don't bet on it. Okta management emphasized in an interview with Barron's on Wednesday that such a move is unlikely. Investors, however, shouldn't be disappointed. This top-notch tech company is likely better off on its own anyway.

A person securely logging into an application on a laptop

Image source: Getty Images.

Why Okta will likely stay independent

"We're more valuable if we stay independent," Okta CEO Todd McKinnon said in the Barron's interview. He cited the importance of the company's relationships with many other software companies.

Okta's independent positioning in the industry likely helps it land and nurture partnerships with many tech companies -- a key factor to the value proposition of Okta's identity management platform. If the company were owned by a larger tech outfit like Microsoft, for instance, Microsoft competitors might be less likely to invest aggressively in Okta integrations.

Impressive momentum

A case can also be made for Okta's investment potential being greater as a stand-alone company than if it were to be acquired. Sure, an acquiring company would undoubtedly pay a premium for Okta stock, giving investors a nice quick gain. Given Okta's staggering momentum and early leadership in the fast-growing identity space, investors who hold the growth stock for the long haul may ultimately do better if the company isn't bought out by a larger, slower-growing player.

Consider Okta's incredible financial momentum as evinced by its fiscal third-quarter results. Total revenue soared 42% year over year to $217.4 million. Net cash provided by operations was $43.4 million, or 20% of total revenue. This was up from operating cash flow of $10.6 million in the year-ago quarter. 

Okta CFO Bill Losch credited the quarter's strong performance to "success with large enterprise customers and the continued secular tailwinds driving our business."

Highlighting management's confidence in Okta's continued momentum, the company now expects full-year fiscal 2021 revenue to be between $822 million and $823 million. Three months ago, management was targeting full-year revenue between $800 million and $803 million. 

"We are seeing the importance of a modern identity platform like the Okta Identity Cloud grow as businesses around the world accelerate their adoption of cloud-based applications and reimagine their digital customer experiences," said McKinnon in the company's fiscal third-quarter earnings release.

With business momentum like this, investors should be all for Okta staying independent. Not only does this freedom help the company build meaningful partnerships, but it also lets shareholders continue owning this exciting growth story.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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