The momentum in the Nasdaq may have stalled in August, but there's no question the tech-heavy index is having a banner year, making a robust recovery from a dismal 2022. Year to date, the Nasdaq is up 35% -- meeting some definitions of a bull market -- but it still has to climb roughly 15% more to reach a new all-time high.
One stock that's ridden the recovery and still has a lot of room to rebound is cloud software specialist Okta (OKTA -0.69%).
Okta is the leading independent identity provider. The company's products help organizations allow their employees and customers seamlessly and securely log in to the apps they need, and stay connected.
Okta stock popped on its recent third-quarter earnings report, climbing 13.5% Thursday on strong results. The company topped expectations on the top and bottom lines: Revenue was up 23% to $556 million. Adjusted earnings per share jumped from $0.10 to $0.31, since the company has controlled costs as it's grown.
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A new bull run could be here
Like those in much of the software sector, Okta's shares plunged through 2022 as valuations compressed across the board. The company faced its own challenges, including difficulties integrating the sales force at Auth0, the customer identity software company it acquired in May 2021. Okta stepped back from long-term guidance that had called for it to hit $4 billion in revenue and $800 million in free cash flow by fiscal 2026, which ends in January 2026.
The good news is that the company has put the sales-force challenges behind it and is executing well. The stock has nearly doubled from its low point last November but is still down 70% from its peak in 2021, one sign that it still has a lot of room for growth if Okta can deliver strong results.
Revenue growth has decelerated thanks to lessened impact from the Auth0 acquisition and because of the difficult macroeconomic environment, but management said it saw macro factors stabilizing in the quarter. This past quarter revenue growth only decelerated modestly, going from 25% in Q1 to 23% in Q2, so its growth rate is steadying.
In an interview with The Motley Fool, CEO Todd McKinnon said that the company's growth was limited in part by what's happening in the macro environment.
New products are leading the way
In addition to the stabilizing macro environment, the company is also benefiting from new products. These include Okta Identity Governance, Okta for Global 2000, and Okta Privileged Access, which is expected to be generally available in the fourth quarter.
Okta Identity Governance (OIG) was key to driving expansion and attracting new customers. OIG drove a significant upsell at Ryder Truck Rentals and was also the lead product for a number of new customers. On the earnings call, McKinnon also said that nearly half of the OIG business the company booked in the second quarter came from customers that hadn't used the components underpinning OIG: lifecycle management and workflows.
Okta for Global 2000, meanwhile, gives businesses the flexibility to choose which units to operate centrally and which to decentralize. This gives Okta an advantage over monolithic identity providers like Microsoft, which don't offer the same level of customization.
While Privileged Access hasn't yet become accretive to growth, it represents a significant addressable market for Okta. It should dovetail well with Okta Identity Governance and the company's broader workforce identity product suite.
Why Okta stock could soar
Even as its growth rate has moderated, Okta continues to put up strong numbers in a challenging environment. Its valuation looks much more reasonable at a price-to-sales ratio of 6, based on the company's revenue forecast for the year. Its profitability has also improved significantly and should continue to do so, as Okta has shown it can control costs and grow the business.
The company might need a recovery in the macro environment before the stock can fully break out, but that will happen eventually. As revenue growth accelerates, Okta leverages its new products and a more efficient cost structure, and it continues to be valued more reasonably, the stock could soar.
