Between a general rout in tech stocks and a some disappointing profitability numbers, identity and access management company Okta (OKTA 0.44%) may not look like a screaming buy right now.
But in this clip from "The Virtual Opportunities Show" on Motley Fool Live, recorded on June 7, Motley Fool contributor Demitri Kalogeropoulos explains why he's keeping an eye on the stock and some things to look for before you buy in.
Demitri Kalogeropoulos: Digital identity management is what they get into. Stock's been beaten down. It was that uptick you see in the bottom right corner there's right after earnings came out last week. They did report earnings, slower growth, but still pretty phenomenal growth as sales were up about 65% through late April, and this is a company that basically helps enterprises manage their digital identities, and things like authentication, cybersecurity, and things like that. Just a massive market, but a smallish player in this market. Sales growth looked good, engagement is great, they're getting a lot of bigger clients, those over a $100,000 a year contracts are more important like we're seeing with companies like Zoom, and so that looks great.
One of the big things to worry about is the operating losses. The company lost money last year and they're projecting another operating loss this year and mainly that has to do with because of the fact that they recently purchased this major acquisition called Auth0, and that company is in earlier phase of its growth than Okta, so its margins are lower anyway, so it's bringing the whole company's margins down, and so there's a concern there about the company getting into this place of good profitability. But if you look at cash flow management, projecting in the cloud business like this, that's a better number, I think, to follow.
But they're hoping to get free-cash-flow margin up to 20% of sales in the next couple of years, it's at 55% right now. That's a big reason why I'm watching that, and then Okta did raise its sales outlook just like rival Palo Alto Networks did about a week earlier. The growth outlook is great not only in the short term, but I think in the long term in this company and I guess it's one I would just keep on my radar if you're following that. I might not jump into the stock right now if it's still not really showing a clear path toward sustainable profitability. But there's a lot of good things to like about that business.
