Okta (NASDAQ:OKTA) is used by some of the largest firms in the world, and notably includes Apple among its list of customers.
But what exactly is it about this cloud-based identity management and security firm that has caught the eye of big investors?
After all, Okta simply helps clients to manage user accounts for various databases and platforms, what’s so exciting about that?
Okta’s Growth Potential Is Huge
The biggest development in Okta’s financial picture over the last year is the fact that the company has finally become profitable.
Management reported a small but positive net income in each of the last three quarters, a first for Okta since it went public. This turn to profitability has coincided with slowing but persistent revenue growth. Okta has never posted a year-over-year revenue decline, but its quarterly growth rate has slowed to the low teens.
In 2024, Okta delivered a 15% revenue growth rate and generated a total of $2.61 billion. Free cash flow totaled $730 million, a 28% FCF margin.
Although management still posted a GAAP operating loss of $74 million for the year, this was a fraction of the $516 million operating loss it reported in 2023. Net income for the year barely crossed the finish line into positive territory with a GAAP income of $28 million.
In 2025, the leadership team expects top line growth to slow even more into the 9-10% range. Free cash flow margin is expected to remain roughly in its current range at about 26% of revenue.
On a non-GAAP basis, management expects to see earnings of up to $3.20 per diluted share. Okta didn’t, however, provide forward guidance for its EPS on a GAAP basis. Over the next several years, analysts do expect to see Okta’s earnings per share rise by about 22.5% annually.
Okta’s reserve of cash and cash equivalents grew substantially last year, rising from $334 million at the end of 2023 to $409 million at the end of 2024.
At the same time, they managed to reduce its long-term debt by nearly 70% to a total of just under $350 million. These improvements in Okta’s balance sheet are crucial to long-term scaling and you’ll see all the top firms from Alphabet to Apple on down are fortresses in this regard.
Addressing Okta’s High Valuation
Even though Okta’s business is doing well, there’s no getting around the fact that its valuation is currently quite high.
With a trailing 12-month EPS of just $0.16 as of the most recently reported quarter, Okta’s stock is currently trading at approximately 675x TTM earnings.
Even allowing for the fact that Okta has only recently crossed over to net profitability and so has considerable room left to grow its earnings, the ratio is still extremely high.
It’s also somewhat worrisome that even a fairly bullish slate of analyst price forecasts doesn’t seem to assume much more upside out of Okta in the near future.
To a large degree, the stock’s current valuation is the result of a run-up after Okta achieved profitability. Despite only posting a 3% total return in the last 12 months, the stock has risen by more than 32% in the last 90 days. The market’s enthusiasm for Okta, however, may well have caused it to become either fully valued or overvalued.
Potential overvaluation hasn’t caused institutional investors to sell their shares en masse, though. The rate of institutional buying still exceeds institutional selling, a trend that has been in force since the middle of last year. While this doesn’t necessarily counter the argument that Okta is overvalued, it does show that large investors still have confidence in the stock’s ability to generate future returns.
Is Okta a Good Stock to Buy Now?
The average target price for the stock is currently $116.68, a gain of only 8% compared to the latest close of $107.98. This puts investors in the position of paying a very high premium for a stock that is only expected to produce a high single-digit return.
Despite reasonably solid revenue growth and growing earnings on the horizon, Okta suffers from a couple of different problems at the moment.
First and foremost among these are high valuation multiples that are hard to validate even with fast growth now. So, the potential upside of OKTA shares seems modest at this point.
Okta has also demonstrated a somewhat concerning habit of diluting its shares. In the last reported quarter, for instance, the number of outstanding OKTA shares increased by almost 7% from the year-ago period. If that trend persists, the risk of overpaying at today’s prices is severe and can’t be understated.
Overall, Okta doesn’t look like a particularly compelling stock to buy today. Although the underlying business itself is quite good and the financials will likely ascend at a respectable rate, the stock simply appears to be too expensive. In other words, the amount you pay today for a dollar of future earnings simply looks too high.
With all of this said, those who already own Okta may prefer to hold onto it for the time being. Investors with a lower cost basis in their OKTA shares likely own a more valuable asset than the company was when they purchased it. So, while Okta doesn’t look like an especially good buy today, it may not make sense to sell for investors who have already gotten to take advantage of the recent price increases.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
