After a rough end to 2021 and a bleak start to 2022, it looked as if growth stocks had been left for dead. However, there have been some promising signs over the last few weeks. Former growth stock darlings like Roblox, Zoom, and Atlassian have bounced off their May lows and logged their first positive month in almost a year.
Okta (OKTA -4.10%), a maker of secure identity technology, is another growth stock that has bounced in recent weeks. The stock is still down 65% from its 2021 high but has rallied back 30% in the last three weeks alone.
So is the bottom in for Okta? Is now the time to buy? Let's have a look at both the bull and bear cases.
Bull case: Revenue growth will power Okta's stock higher
Okta specializes in two types of identity protection:
- Workplace security
- Customer security
Workplace security is employee-access security. To this end, Okta helps companies ensure only valid personnel access their systems through zero-trust verification. Employees must verify their identities using multiple-factor methods to guarantee that only authorized users can access systems and data. Customer security involves securing websites and user profiles, so customer data remains secure.
With so much of today's economic activity taking place online, the risk and costs of cybercrime have skyrocketed. And with all the demand for cybersecurity, Okta is generating massive revenue growth. The company's revenue grew 65.3% in the most recent quarter, to $415 million.
OKTA Revenue (Quarterly YoY Growth) data by YCharts
The bull case for Okta is that revenue growth will remain strong as the company continues to add clients at a brisk pace.
Bear case: No earnings and a recent hack raise concerns
Okta, like many growth stocks, lacks profits. But Okta isn't just unprofitable -- it's extremely unprofitable. The company recorded a net loss of $982 million over the last 12 months -- that's an operating margin of -62.6%. What's more, this operating loss has grown as the company's free cash flow is shrinking. Okta generated only $0.29 of free cash flow per share in the most recent quarter, down from $1.03 a year ago.
OKTA Operating Margin (TTM) data by YCharts
In addition to these unsettling financial figures, Okta experienced a head-on challenge to its reputation in March: a security breach. The company quickly concluded an investigation that stated the breach lasted less than 30 minutes and affected only two of Okta's customers. Nevertheless, it was a terrible headline for Okta and a knock on the company's reputation.
Is now the time to buy?
Okta is a typical growth stock. It has a promising business model, a large total addressable market, and a high rate of growth. Unfortunately, it also comes with many of the traditional downsides to growth stocks. It's unprofitable; it's not generating much cash; high interest rates could snuff out its growth. So, in the final analysis, there is probably a place for Okta in the portfolio of an investor who is too underweight on growth stocks. But for those who already have exposure to tech or growth stocks, it's safe to pass on Okta.
