All of a sudden, tech stocks look jittery.
A combination of rising interest rates, tightening monetary policy from the Federal Reserve, and fears about the new omicron coronavirus variant have spooked dozens of high-growth stocks, many of which were big winners during the pandemic. After reaching an all-time high on Nov. 22 at 16,212.23, the tech-heavy Nasdaq lost 1,300 points, or 8% in less than two weeks.
ARK Innovation ETF, Cathie Wood's flagship ETF and a proxy for high-growth tech stocks, was down by more than 25% at one point over the last month.
Cloud identity specialist Okta (OKTA 1.21%) hasn't escaped this malaise as the company hit a 52-week low on Dec. 1 before its third-quarter earnings report. However, though it trades at a lofty price-to-sales ratio near 30, the company's recent earnings report and its track record show why the stock is a safe bet even during a tumultuous time for tech stocks. Here are a few reasons why.
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A reliable performance
Though the software-as-a-service industry relies on the stability of the subscription model, many SaaS companies have seen erratic swings in their growth rates from quarter to quarter, especially during the pandemic, which favored some cloud companies and was a headwind for others. Okta, on the other hand, has been remarkably steady through the crisis. Since the start of 2020, its quarterly revenue growth, excluding the impact of the Auth0 acquisition, has ranged from 37% to 46%. It has even accelerated since the first quarter of 2021, as revenue from stand-alone Okta jumped 40% in the most recent quarter. The company is also targeting revenue growth of at least 35% through 2025.
Okta has evolved in a number of ways since its 2017 IPO. Its addressable market has gotten much bigger, from an estimated $18 billion to now $80 billion with the addition of customer identity access management (CIAM), and more recently, Privileged Access Management (PAM) and Identity Governance and Administration (IGA), two new categories that the company recently announced will add $15 billion to its addressable market.
In addition to an expanding addressable market, Okta has also made substantial progress with its own product suite. When it went public in 2017, most of its sales came from its Identity Cloud suite. Now, individual products are the key drivers of its growth as its most popular tools have become comprehensive enough to launch as stand-alone products. These include Okta Workflows, which help automate processes like following up with a customer, Multi-Factor Authentication, which handles secure logins on more than one device, and Lifecycle Management, which adds and removes security levels according to the status of an employee.
Those product enhancements have helped drive steady growth from both new customers and existing ones. Net retention rate in the third quarter was 122%, and it has been above 120% for the last seven quarters. The company also added 950 customers in the latest quarter to reach 14,000, including Under Armour and a Fortune 100 financial services company, it said on the earnings call. Additionally, its 49% growth in remaining performance obligations, a proxy for backlog, shows that its customer pipeline is strong.
The Auth0 acquisition is working
Investors were initially puzzled when Okta said in March that it was spending $6.5 billion to acquire Auth0 as the stock fell by double digits on the news. However, the early results show that the deal is paying off. Auth0 has added a valuable chunk of revenue and customers to Okta with $46 million in revenue from Auth0 in the third quarter, but more importantly, the customer identity access management company complements Okta well. Auth0 is strong internationally, beefing up Okta's presence outside the U.S. COO Frederic Kerrest said in an interview with The Motley Fool that the two brands have seen "great cross-sell" with Auth0 CIAM customers like NASCAR signed up for Okta Workforce Identity products and Okta customers have similarly embraced Auth0's offering.
Okta and Auth0 are on track to merge their sales teams in February at the start of the next fiscal year, which is just in time for the company to begin selling its IGA and PAM product, which are currently in beta mode. Kerrest said the company had seen an "overwhelming response" to the IGA beta and that customers are hungry for Okta's latest offering.
Okta was the top-ranked company for execution in access management in Gartner's recent Magic Quadrant report, while Auth0 was named as a leader for the first time, showing the company's technology is top-rated.
Altogether, Okta has an impressive track record of growth and execution over its nearly five years as a publicly traded company, and its momentum looks strong as it integrates Auth0, expands to IGA and PAM, and targets $4 billion in revenue by 2025.
While the cloud sector could be vulnerable in a tightening monetary environment, Okta has the fortitude to withstand a broad sell-off in the tech sector.
