Okta (OKTA -0.76%) investors are in for more stock price volatility over the next few days. The software specialist's stock, which has been left out of the 2021 rally, should move in response to the upcoming earnings report, set for Wednesday, Dec. 1.
That announcement should show strong sales trends in the digital identity management space as businesses continue pushing more of their activities online. But it could also show profitability challenges while Okta works to integrate the Auth0 segment into the fold.
Let's take a closer look at three trends worth watching in Wednesday's report.
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1. Organic sales
Most investors who follow the stock are looking for Okta to flex its growth muscles once again in the third quarter. Sales should jump about 50% to $327 million, according to the Wall Street pros, or roughly in line with management's early September outlook.
A big piece of that spike will come from the newly acquired Auth0 segment, which is now in its second quarter as part of the Okta business. Watch for management to break down growth trends excluding this segment, too.
The core business grew 39% last quarter and ideally that expansion rate will be just as strong in Q3. Contract renewals, new client growth, and contract value metrics should all imply solid engagement around Okta's portfolio of digital identity management services.
2. The profit pressure
Investors have two big questions about the Auth0 merger that should be answered in this report. The first is whether the integration is still going as well as it did in Q2, when CEO Todd McKinnon said, "We're off to a fantastic start." Okta is hoping the purchase gives it a more complete portfolio of products to offer customers.
Yet the $7 billion acquisition might generate major integration challenges, and we'll learn about those potential issues this week.
Second, Auth0 has more growth-focused business lines that are likely to keep reducing Okta's overall profitability. Adjusted operating loss expanded to 8% of sales last quarter, for example, compared to 6% in the prior quarter. Shareholders want to know how long this pressure will last, and whether Okta can reasonably target net profits by 2022.
3. The new outlook
Heading into the report, executives are predicting sales will rise roughly 50% this year to about $1.25 billion. That outlook from early September represented a boost from the prior forecast calling for growth rates of 45% to 47% in 2021.
Wednesday's announcement might include another modest boost to the short-term sales prediction. But the bigger trend to watch for is Okta's growing addressable market size. The wider services portfolio should give it access to a significant chunk of $80 billion of global annual sales across areas like digital identity authentication, tracking, security, and fraud protection.
Finishing 2021 at just over $1 billion in annual revenue might mark just the start of a long runway for growth as Okta wins more of that global market.
