What Investors Need to Know About Okta's Acquisition of Auth0

If you're an existing or potential investor in Okta (OKTA -1.63%), you're likely aware of its $6.5 billion acquisition of Auth0 last spring. As the Software-as-a-Service space becomes increasingly overcrowded, what should investors think of this recent business expansion and how can it help position Okta for future success? In this segment of Backstage Pass, recorded on Dec. 17, Fool contributors Jason Hall and Toby Bordelon discuss. 

Jason Hall: This was the Okta acquiring Auth0 and this was nearly a merger. Because it was mostly a stock deal and it was a pretty big deal of two companies where Okta's the bigger one. It was the acquirer in the deal. I think it was $7.5 billion was the total value, give or take a little bit, I think somewhere where it came in there. Here was the basic idea.

You're taking workforce identity, which was Okta, and customer identity which was Auth0 and combined like a $55 billion market opportunity. These are two companies that they do the same thing, but they didn't really compete because again, they were on different sides.

The workforce enterprise side, and then the customer side of it was again external identity for people trying to engage within enterprises system and bridging that zero-trust. Again, this is just a couple of slides from their presentation. I wanted to show this because this is Okta's justification.

They're picking up $200 million a year in annualized recurring revenue. A company that's growing 50% a year, 95% of its revenue is recurring, and a net revenue retention rate of over 120%.

Meaning for every dollar their customers gave them last year, they are giving them a $1.20 this year. Customers are spending more, you're adding more customers and most of that revenue is recurring.

Those are all the things. Another thing was, these are two companies in Gartner's Magic Quadrant. If you're a company, you want to be up into the right. You want to be that leader's quadrant.

Auth0 and Okta were both up there with Microsoft and with another small company, I can't remember the name of. There are basically four or five companies that are in that quadrant. It looks like a good deal on the surface.

But I want to show one more thing real quickly because I think this really tells the tale. This is since March 3rd since the deal became definitive. Nobody knows what the hell the company is worth.

Toby Bordelon: Yeah.

Jason Hall: I mean, that's really what this slide says. This isn't the performance of the business being good or bad. It's nobody has yet figured out in the five months, seven months, what's the math here? Nine. There we go. That's the numbers. The nine months since this deal was finalized, nobody has really figured out what the company is worth. It's been incredibly volatile, up on earnings, down on guidance just not too long ago.

Then compared to a tech market that since that period has generated 25% in gains. A head scratcher, I think there's still a lot of trying to figure out if the economies of scale makes sense.

If taking these two businesses that do the same thing for different cohorts and smashing them together really makes sense? I think maybe it does, but I'm not a big expert, to be honest with you, it's just such an interesting deal.

Toby Bordelon: Yeah. It is. It is interesting. I think it does make sense at some level. I am a little surprised we never got any kind of antitrust issue, but there isn't going to be any antitrust issues here?

Jason Hall: No. I mean like Microsoft already is in this too.

Toby Bordelon: I guess that's what it is. It's because you've got much bigger players that are already in.

Jason Hall: A lot of big players and there are smaller players that are getting squeezed out of here too. I'm a big fan of Todd McKinnon.

That's Okta's CEO. Really humble guy. Still super young. Still has a big stake in the business, is the founder. I think they've got good leadership in place. We'll see how it works out. I think it probably works out.