Okta (OKTA -0.69%) is winning its way back into Wall Street's good graces. Shares jumped over 20% immediately following the cybersecurity specialist's fourth-quarter earnings report. Okta stock is up 50% in the past full year, nearly doubling the return in the rallying S&P 500 over that time.
Let's dive right into the report for the biggest takeaways on Okta's operating momentum.
1. Subscription growth
The good times are rolling for software-infrastructure businesses that cater to large customers, and Okta is capitalizing on the surge. Reported sales were up 19%, and its subscription-based revenue jumped 20%, primarily reflecting higher demand from enterprises looking to bulk up their digital-identity management abilities. "Organizations continue to turn to Okta to help modernize and simplify their identity infrastructure," CEO Todd McKinnon said in a press release .
2. Soaring cash flow
Okta is a software-as-a-service business, and so its reported earnings don't tell the complete picture on its growth prospects. Cash flow is more instructive, given how the company books most of its sales over a subscription period of a year or longer.
Investors had good reasons to celebrate about this metric as Q4 operating cash flow more than doubled to $174 million, or 29% of sales. Okta is now sitting on $2 billion of cash after generating over $500 million during the full 2024 fiscal year that ended Jan. 31.
3. Higher non-GAAP margins
Okta took a big step toward profitability this year as net losses shrank to $355 million from $815 million a year ago. Non-GAAP margins look even better. Gross profit margin improved to 80% of sales on that basis from 78% of sales a year earlier. Operating profit rose to 14% of sales from a 1% loss.
This momentum makes it seem likely that Okta will reach sustainable profitability perhaps starting in fiscal 2025. It's no wonder, then, that executives were thrilled with the financial results. "We achieved record non-GAAP profitability and record cash flow...capping a year of significant margin expansion," McKinnon said.
4. Backlog is solid
Okta's growth isn't stalling, either. Instead, the company's backlog, which represents sales that will be booked over the next year, was up 16% this quarter. That helps explain why Okta is calling for revenue to rise by about 16% to kick off fiscal 2025. Non-GAAP operating profit margin should land at 18% of sales from 14% last year.
The outlook isn't uniformly positive, though. Okta is calling for slower sales gains of about 10% in 2025 compared to this past year's 22% spike. Cash flow will be solidly positive but will also worsen slightly as a percentage of sales.
It makes sense that investors would send the stock higher following this report, yet Okta's rally makes it a pricey stock to purchase today. You'll have to pay eight times sales for this business, easily the biggest premium that shareholders have seen in the past year. For context, Palo Alto Networks, which is much more established and highly profitable, is priced at 14 times sales.
Still, investors who prize growth and are willing to sit through volatility might consider adding Okta to their watchlists. The stock's returns should continue beating the market if the business maintains its positive-sales momentum while moving toward profitability in 2024.
