Okta's (OKTA 0.45%) stock has not fared well in 2022. The year started with investors lowering the valuations of high-growth, unprofitable companies like Okta due to worries over high inflation and rising interest rates. Next, Okta faced the worst news that an identity company could encounter when in March, news broke that hackers had breached the company's internal systems.

Now that the stock trades around the same price it did in March 2020, some investors wonder whether Okta can bounce back. Here's two reasons why Okta is ready for a big rebound.

Person is looking at a security app on a mobile phone.

Image source: Getty Images.

1. Okta is trading at a low valuation

Okta currently trades at 10.9 times trailing-12-month sales, and the last time Okta traded this low was at the end of 2017, the year Okta came public.

OKTA PS Ratio Chart

OKTA PS Ratio data by YCharts.

However, Okta is today a much better company than in 2017. And even as Okta's valuation dropped from 2021 into 2022, the company was firing on all cylinders as revenue growth began reaccelerating after several years of slowing revenue growth.

OKTA Revenue (Annual YoY Growth) Chart

OKTA Revenue (Annual YoY Growth) data by YCharts.

Additionally, Okta's revenues on a trailing-12-month basis as of April 2022 were $1.46 billion, which is only 1.82% of Okta's estimated $80 billion total addressable market. So, in addition to being a rapid grower in a down market, Okta still has significant room to grow in the identity industry.

Last, on the company's first-quarter 2023 earnings call, Okta's CFO reiterated the company's long-term financial goals of $4 billion in revenues by fiscal 2026 with organic growth of at least 35% each year. Additionally, the company expects a 20% free cash flow margin in fiscal 2026.

A chart shows Okta's long-term growth.

Source: Okta first quarter fiscal 2023 investor presentation.

Investors must have believed the above long-term guidance is achievable, as the stock rose almost 11% since Okta released the results on June 2.

2. Okta's one big competitive advantage

Okta's most significant competitive advantage is the Okta Integration Network (OIN). Industry experts consider OIN the identity industry's broadest and deepest set of pre-integrated cloud apps. OIN is used for single sign-on (SSO), meaning users only need to sign on to Okta to access more than 7,000 third-party applications or platforms, including Amazon's AWS, Microsoft's Azure, and Alphabet's Google Workspace (formerly G-Suite). And because the applications are pre-integrated, customers can set up SSO faster than many competing solutions.

OIN creates a strong network effect, where each new app or platform joining the network makes the service much more valuable to customers. Additionally, each new customer that uses Okta's SSO increases the attractiveness for application providers or platforms to integrate into OIN. The snowball effect of the growing value of OIN for both customers and application providers produces a very sticky service. It also makes things difficult for many identity competitors to catch up with Okta.

Even older, more prominent cloud platforms that provide identity services have yet to overwhelm Okta's integration advantage. One big reason is that many older cloud services have an inherent bias against integrating with third-party technology providers that compete against them in other areas. 

For example, many of Microsoft's long-time customers prefer Okta because it provides a better integration solution into third-party best-of-breed platforms like Box, Slack Technologies, and Zoom Video Communications, which compete against products in Microsoft Teams and 365 suites. Okta's customers can set up an SSO solution on any application across any platform on its integration network in less time than Microsoft's SSO product. Okta also doesn't require buying and maintaining hardware like Microsoft's identity solution.

A data breach upsets the applecart

Investors became concerned about how customers might react when news of an Okta security breach was revealed on March 22, considering that as many as 366 of Okta's customers may have been affected. These investor concerns are partially responsible for the stock dropping 54% from March 22 to May 24.

While Okta's first-quarter fiscal 2023 results showed no sign of customer attrition, the news of the data breach occurred near the end of the quarter, so those results wouldn't reflect much impact from the event. However, the good news is that Okta released its first-quarter results on June 2, meaning management had two months to analyze customer trends and yet still raised fiscal 2023 full-year revenue guidance.

Therefore, investors can infer from the raised guidance that the breach had minimal effect on the business before June 2.

If you are a risk taker, you can consider buying Okta at current prices. However, more conservative investors might want to wait to see what the company's second-quarter results reveal about customer growth trends before deciding to invest.