Investors have been excited about Okta (OKTA 4.17%) stock as a way to gain exposure to the digital transformation industry. The cloud services specialist has a head start in attractive niches like identity management, and it also enjoys a rapidly expanding addressable market in cybersecurity. But its shares completely missed the 2021 rally, falling by more than 10% compared with the S&P 500's 26.9% spike.
The good news is that this slump left Okta cheaper compared with some of its peers, even if it still sports an expensive valuation. But would new investors get a good deal on the stock by buying now?
Great engagement trends
Okta is situated right in the middle of some huge growth trends. As a leading digital identity management specialist, it's benefiting from the broad push to move more work processes online and allow for more hybrid work arrangements. In short, it's a great way to invest in digital transformation trends that are likely to power growth for many years to come.
The company's sales trends reflect its ideal market position. Revenue was up 61% in its latest reported quarter and grew 40% on an organic basis. Its purchase of Auth0 provided the remaining lift. Customer growth is strong at about 50% year over year, and Okta is having no trouble convincing clients to renew and expand their contracts. Its success on that front shows up in a few metrics, including in its recent 59% spike in annual contract value for large clients. Okta's net retention rate (aka the value of renewed contracts compared with the previous year) is an impressive 122%.
The picture is similarly bright when it comes to Okta's finances: Since 2018, margins have been rising and cash flow has been surging. However, the company isn't consistently profitable yet. And its margins fell as the company worked to integrate the massive Auth0 acquisition it closed in May.
Strip out the temporary impact from that disruption, though, and Okta's finances show lots of promise. Its customer base is becoming more profitable with each passing year as clients sign on for more services -- a trend that's likely to pull its earnings much higher over time.
Management is targeting a free cash flow margin of at least 20% by its fiscal 2026 (which ends Jan. 31, 2026) and aims to grow sales at an over 30% annualized rate. Progress toward these targets should help support strong investor returns.
Is the stock overpriced?
The level of those investor returns will depend in part on whether Okta is too expensive right now. And, with shares trading at more than 25 times annual sales, that's a real possibility. You could own shares of Microsoft or Zoom Video Communications, two other popular bets on the digital transformation, for about 15 times their respective revenues.
Okta has a clearer path toward growth, though, assuming it is able to expand its sales at its planned 30%-plus annualized clip toward $4 billion in fiscal 2026. Microsoft, by contrast, is expected to grow at about 14% in 2022, and investors are expecting roughly the same from Zoom.
Thus, if you're looking for faster growth -- and don't mind waiting a year or so for Okta to begin showing off its long-term earnings potential -- the stock might be a great addition to your portfolio this year.