Why Investors Should Be Watching Okta

Digital identity and access management specialist Okta (OKTA -0.65%) has a good shot at growing well beyond its current revenues.  

In this video from The Virtual Opportunities Show, broadcast on Nov. 30, Motley Fool contributors Demitri Kalogeropoulos, Asit Sharma, and Rachel Warren discuss why Okta could deliver good returns for shareholders over the next few years.

Demitri Kalogeropoulos: The stock I picked is in the digital transformation space, and it's Okta. The ticker symbol is OKTA, one of those rare cases where it's the full company name. This is basically a software company, a cloud services company that specializes in digital identity management -- so, basically, helping businesses move more of their processes and people online, which you can imagine is definitely a fundamental part of this space.

I highlight Okta for two big reasons right now. The first is they report earnings tomorrow after the closing bell, that's Dec. 1. So it's definitely worth watching the stock. It's a surprise to me that the stock is down about 8% so far this year, where the rest of the market is up around 20%.

It's still up a lot in the last three years, but it's not had a really good 2021. So it's definitely one worth watching, if you're excited about this space and turned off by some of the surging share prices in some of those other stocks. But I wanted to highlight a slide or two from their last earnings report. I always struggle to do this right. Let's see if I can share my screen... and hopefully, that one's coming across.

This is just a big picture slide of Okta ... "at a glance," they call it, and you can see on the right here, this is their annual sales over the last four years. And they are projected to rake in $1.2 billion in annual sales this fiscal year -- fiscal 2022. And just two years ago, that was half of that, $600 million, and the year before that, it was $400 million.

So clearly, a lot of growth. Some of that's coming from a major acquisition they made recently. But the other number to highlight here is this 124%. We talked last week a little bit about the customer engagement metric -- that's hard to capture, but we always like to see, and I always like to see, in my stocks, at least. That's what that number tells me.

This is dollar-based net retention rate, which is a long way of saying "the rate at which people renew their annual contracts." This 124% equates to basically 24% higher renewal of the value of your contract to the one you had the year before. That just speaks to Okta's ability to market more of its products to customers, and it's got a lot of customer loyalty because of that net number. You love to see that number being significantly above 100%, which it is.

Then the other slide I'd like to highlight here -- let me see if I can find it, there we go -- speaks to its attractive, addressable market. They recently bought this company called Auth0, and it was about a $7 billion purchase -- massive purchase. It unlocked a whole lot of new space that they're hoping to grow in in things like security, end-to-end fraud protection, and just a lot bigger than this Identity Cloud, which is their traditional space.

That's got investors pretty excited. But the thing is, Wall Street's kind of nervous about the acquisition, I think. If I was looking for reasons to why the stock would be underperforming right now, it's a big acquisition, and it's probably going to bring profitability down at least for the next year or so because Auth0 is more growth-focused, so margins are going to drop a little bit, earnings are going to look maybe a little weaker over the next year or two.

Then, a purchase like this always can bring some surprises. Integration could be a challenge, and I guess investors are just nervous about all that stuff. But this one might be one definitely worth watching in the earnings report tomorrow. I've owned it for several years and it's a really attractive business, I think, and they've got just a growing portfolio of customers, which is obviously great, and they're succeeding in building out these new offerings to get these engaged customers to get more involved in the business. I think those are points that suggest it's going to be around for a while.

Rachel Warren: Very cool. Yes, I do not own shares of that company. [laughs] Go ahead. If you have something to say before I move on to Shopify.

Asit Sharma: That just real briefly, yeah. I had watched the stock settle as other peer companies -- I won't say direct competitors because Okta is a little bit unique in the space -- were having a very good year, and I think it is related to that Auth0 acquisition. They hit different parts of the identity market, and management had promised a lot of synergies. I think those might take some time to work out. You said tomorrow they're reporting?

Kalogeropoulos: Yeah. Tomorrow afternoon.

Sharma: Yes. So this can be interesting -- another quarter of data, we get to see if that picture's starting to come together, at which point investors might rush in and say "We should've been with Okta all along," or further confirmation that it's a little harder because it's such a big acquisition to digest. So, very interesting.