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Is Okta Stock a Buy?

By Chris Neiger - Apr 26, 2021 at 7:00AM

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The identity and access management specialist is nowhere near finished growing.

Companies need more protection for their online accounts than ever before, and to get it, many are turning to Okta's (OKTA 1.62%) identity and access management services. 

Okta helps companies manage their employees' and customers' logins, making it easy for each individual to access precisely the information they are supposed to have access to and, just as important, keeping everyone from gaining access to what they shouldn't be able to see

Optimism about the company's growing business has driven its share price upward by about 90% over the past year, and with that spike in value behind it, some investors may wonder if Okta's stock is still a buy. To answer that, let's take a look at the tech company's growth rate, its addressable market, and how it's earning more money from its current customers. 

A woman using a smartphone.

Image source: Getty Images.

Okta's impressive fiscal 2021 

In Okta's fiscal 2021, which ended Jan. 31, revenue jumped 43% to $835.4 million as subscription sales increased 44%. That growth came in part as new clients looked to Okta to help their employees securely access their data, applications, and websites while working from home.

The company ended the fiscal year with about 10,000 customers -- up from just 6,100 two years earlier -- and on average, Okta is earning more money from each of them than ever before. Nearly 2,000 of Okta's customers had annual contracts valued at more than $100,000 in the fourth quarter, up 33% from the year-ago quarter.  

Cash flow more than doubled in fiscal 2021 to $128 million, up from $55.6 million in fiscal 2020. The company's non-GAAP earnings also improved from a loss of $0.27 per share in fiscal 2020 to a profit of $0.11 per share in fiscal 2021. 

With these impressive results, it's no wonder Okta's share price surged last year. But the company was already on a strong growth trajectory before the pandemic, and it's likely that it will continue growing after conditions return to relative normal.

Why Okta can keep growing post-pandemic

It's understandable that some investors are looking at the tech sector with a bit of a skeptical eye right now. Many technology stocks have slid since the beginning of this year as investors shifted their attention and assets to other sectors they believe are poised for faster growth in a post-pandemic world.

But consider how Okta was doing prior to the crisis. In its fiscal 2020 -- which ended a couple of months before lockdowns began in the U.S. -- sales increased 47% year over year. No work-from-home bump here, just organic revenue growth. 

And the company wasn't just adding new customers, it was getting its established clients to spend more on its services as well. Okta's customer count increased by 30% in its fiscal 2020, and it ended the year with a dollar-based net retention rate of 119%. Anything above 100% shows that it's convincing its customers to add new services and spend more money with it than they did the year before. 

And to reiterate -- all of this was happening before the pandemic.

Moreover, management thinks that the company's total addressable market has grown over the past few years. They previously had said that its TAM was $55 billion, split between a $30 billion workplace identity market and a $25 billion customer identity market. 

But the company has added new services, including identity governance administration and privileged access management. Management believes those add an additional $25 billion worth of opportunities, bringing Okta's total addressable market to $80 billion

Is Okta stock a buy?

Between Okta's impressive growth prior to the pandemic, its accelerated gains during the pandemic, and the moves it has made to increase its addressable markets, I think there's a solid case to be made for buying this stock. 

Will Okta's share price climb as fast in 2021 as it did in 2020? Probably not. But if the company continues to steadily increase its customer count, keeps its dollar-based retention rate above 100%, and taps into its new service opportunities, it should be able to easily outpace the broader market's gains over the next few years. 

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Okta. The Motley Fool has a disclosure policy.

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