Should Okta Shareholders Sell After the Recent Cyberattack?

In the last few months, cybercrime group Lapsus$ has claimed responsibility for several attacks on high-profile tech companies. The hacker team stole, and in some cases leaked, proprietary information, including source code, from Microsoft's Bing search engine and the credentials of Nvidia employees. But of all the targets hit by Lapsus$, cybersecurity firm Okta (OKTA -1.27%) may be the most alarming.

A successful data breach is never good news for any business, but it's an especially bad look for a cybersecurity company. Should Okta shareholders sell? Let's dive in.

Image source: Getty Images.

The data breach

Okta specializes in identity and access management (IAM). Its platform, the Okta Identity Cloud, helps organizations secure sensitive data with contextual access policies. Okta leans on artificial intelligence to authenticate users (i.e. verify their identities) based on features like device, location, and behavior. It then reconciles requests with corporate policies to either authorize or deny access to a particular application or technology.

On Jan. 16, Lapsus$ hackers compromised the account of a customer support engineer employed by Sitel, a third party that renders contact center services on behalf of Okta. On Jan. 20, Okta reported suspicious activity on the account to Sitel, and the company then contracted with an outside forensics firm to investigate. In the meantime, the account in question was suspended, effectively terminating the breach.

Nearly two months later, on March 17, Okta received a summary report from the forensic investigation, but news of the breach did not reach the public until Lapsus$ posted screenshots on its Telegram channel on March 22. Those screenshots showed that members of Lapsus$ had access to an internal Okta tool known as the "Super User" application, which allows support engineers to create and delete users, download customer databases, and reset passwords.

Initially, Okta Chief Security Officer David Bradbury said the platform had not been breached. But later the same day, after receiving the complete investigation report from Sitel, he amended his response, noting that up to 366 customers (or 2.5% of Okta's clientele) may have been impacted. Since then, many Okta customers have expressed frustration with the company's failure to make the information public in a more timely fashion.

The price of a data breach

Businesses often pay a high price in the wake of a cyberattack. The average data breach costs $4 million, and most of those damages stem from broken consumer trust, which inevitably leads to lost revenue. That axiom rings twice as true when a cybersecurity company suffers a breach. And Okta's slow response certainly made the situation worse. That being said, the company has since acknowledged its mistake, and is working to restore trust.

It's also worth noting that Okta is not the first cybersecurity company to find itself in this situation. Microsoft has been hit by several other attacks in the past two years. That includes the Solar Winds breach in 2020, an incident in which Russian hackers exploited weaknesses in Microsoft's IAM architecture to access private data from more than 100 companies and nine U.S. government agencies. A few months later, vulnerabilities in Microsoft Exchange Server led to another wave of attacks that potentially impacted 60,000 businesses around the world.

Despite those blows, research company Gartner still recognized Microsoft as a leader (alongside Okta) in access management in October 2021.

The leading identity platform

Despite tumbling initially, Okta's share price is nearly back to pre-incident levels. So should investors take this opportunity to sell? As an Okta shareholder myself, I don't think so. The company may lose customers in the near term, but I think the long-term investment thesis is still intact, assuming its service is not breached again.

Specifically, Okta benefits from an vendor-neutral business model. The Okta Identity Cloud is not associated with (or biased toward) any cloud provider or technology. That gives the company an edge over Microsoft, its most formidable competitor. Additionally, Okta offers pre-built integrations for over 7,000 applications and infrastructures, meaning it provides more out-of-the-box functionality than rivals like Ping Identity.

Better yet, Okta was recently recognized as an industry-leader by both Gartner and Forrester Research. In the Gartner report, Okta outranked all rivals in terms of its ability to execute. And according to the Forrester report, Okta has a stronger current offering and a stronger growth strategy than any competitor. Those accolades have come alongside solid financial results.

Source: YCharts. CAGR = compound annual growth rate. Note: Q4 2022 ended Jan. 31, 2022.

Looking ahead, shareholders have reason to believe Okta can maintain that momentum, including the upcoming launch of two new products. More broadly, management puts its addressable market at $80 billion, and given its status as an industry leader, Okta is well positioned to capitalize on that opportunity. That's why I plan to keep this stock in my portfolio.