Okta Stock Vs CrowdStrike: Which Is Best?

Okta, Inc. (OKTA) and CrowdStrike Holdings, Inc. (CRWD) are two cloud-based network defense offerings each benefiting from several secular tailwinds in the cybersecurity space.

Both have similarities and differences in what they do, and each have seen excellent share price appreciation over the last year.

Despite the threats from malicious actors, spending on cybersecurity measures still only accounts for a small fraction of the typical enterprise IT budget, and, because of this, the total addressable market (TAM) for cybersecurity companies remains large. 

Ransomware attacks cost organizations some $20 billion in 2020, and even large, digitally sophisticated companies like Facebook (FB) and Microsoft (MSFT) haven’t been immune from suffering embarrassing customer data breaches of late.

As much of the economy shifts online, malware and other cyberattacks will become more common, putting the spotlight increasingly on firms like Okta (OKTA) and CrowdStrike (CRWD). 

While both companies operate on a Software-as-a-Service basis, individually they focus on providing different solutions for various aspects of the cybersecurity puzzle.

Okta, for instance, is a specialist in access management solutions, enabling businesses to protect and manage their user authentication process, and allowing developers to build in identity controls into devices, applications and internet services.

CrowdStrike, on the other hand, provides endpoint protection and threat intelligence to prevent an attack, and response services if and when an attack does take place.

Both OKTA and CRWD work complementary with each other, and should not be seen as rivals competing for the same market space. Indeed, Okta and CrowdStrike have recently worked together on the Spectra Alliance collaboration, a project which aims to create a cybersecurity solution for the ever-growing army of remote workers.

But which of these two businesses is the best option for investors, and why?

Okta Has First Mover Advantage

Work practices in the post-pandemic era seem to be holding over from the peak of the Covid-19 crisis, with many employees still working from home, and businesses rapidly shifting their IT networks onto hybrid cloud networks in response. This is all good news for Okta, which has the first-mover advantage in Identity and Access Management, a necessary and critical component of Zero Trust Architectures.

Okta’s business has been growing at a blistering pace, having posted total revenue for the Second Quarter Fiscal 2022 of $316 million, and subscription revenue of $303 million.

Current Remaining Performance Obligations (RPO) – the contracted subscription revenue predicted to be realized over the next 12 months – were up 60% year-on-year at $1.10 billion, as was the firm’s subscription backlog of $2.24 billion, up 57% year-on-year. 

As with many young companies still in their growth stage, Okta is not as yet profitable, having reported a non-GAAP net loss of $16 million, or a diluted net loss per share of $0.11. However, the firm is increasing its operating cash flows, and has cash to hand of $2.47 billion to fund expansion and/or service its debt.

Okta’s share price has grown 30% over the last year, and it recently beat on both revenue and earnings expectations.

Other reassuring growth metrics included the addition of 750 net new customers for the quarter – bringing its current total to over 13,000 customers – and a dollar-based net retention rate up 300 basis points year-on-year at 124%.

Compared to its high-growth peers in the sector, OKTA’s forward Enterprise Value-to-Sales ratio of 31 is reasonable, especially considering that the company can couple this with a very respectable Gross Profit Margin of 72%.

Okta’s management even raised its revenue guidance for the rest of the year – another good sign that the business is where it needs to be going forward.

CrowdStrike Prone To Reputation Risk

Unlike Okta, whose business is fairly sticky and somewhat risk-free, CrowdStrike’s focus on preventing and defeating cyber threats makes its area of operations extremely prone to reputational damage, not least when its protocols fail publicly and catastrophically. This already happened in early 2020 with the SolarWinds exploit, a supply chain attack that targeted multiple U.S. government customers.

However, given the importance of CRWD’s work, the company is able to rapidly grow its client base, as well as branch out into adjacent markets with more product and module offerings as time goes on.

This high potential for expansion has seen investors flocking to the stock, a fact borne out by the company’s 102% share price increase the last 12 months.

And as a result of CrowdStrike’s superior revenue growth this last year, its Price-to-Free Cash Flow of 130 easily beats OKTA’s higher multiple of 298, making the stock decidedly cheaper, at least on this basis.

CrowdStrike’s TAM has also evolved rapidly in just the last couple of years. When the company had its IPO in 2019, CRWD reckoned the cloud security opportunity was worth around $25 billion.

Today, however, CrowdStrike sees that opportunity being worth $36 billion, rising to $106 billion by 2025.

Furthermore, only about 1% of cloud IT spend goes towards security provision; however, the International Data Corporation suggests this should ideally be in the 5-10% range, implying there could be an even larger injection of cash into the industry when companies start deploying more money into the sector. 

The Magic Number

One of the most important metrics in assessing companies like Okta and CrowdStrike is the so-called SaaS Magic Number.

The Magic Number was popularized by Lars Leckie around 20 years ago, who cited it as a way to figure out the efficiency of a company’s sales and marketing spend given the amount of annual recurring revenue (ARR) that it produced. For a subscription-based business, ARR relates to the monetary value of the firm’s subscriber base, and is tightly correlated with its monthly recurring revenue.

The Magic Number can be calculated for each company based on the following equation:

Magic Number = (Current Quarter Revenue – Previous Quarter Revenue) * 4 / Previous Quarter Sales & Marketing Spend

A Magic Number above 0.75 means that a company is getting sufficient revenue from its marketing spend, and should continue investing as it is. The higher the number the better. However, a number less than 0.75 means that an enterprise is falling short somewhere along the way.

Using the latest quarterly figures, this gives OKTA a rating of 0.5 and CRWD a rating of 1.3. While the Magic Number isn’t perfect and shouldn’t be taken in isolation, it does provide some feedback on whether a firm is optimizing its resources correctly.

Given the numbers here, it appears that Otka is not making the kind of margin on its spend that justifies continued investment, and the company would be better off reassessing it sales and marketing strategy.

Perhaps its churn is low, or its pricing model has yet to be ironed out. CrowdStrike, however, is getting a very good return on its spend, and should continue on in the same vein.

And the Winner is…

Cybersecurity is no longer an optional luxury for the lucky few that had the foresight and wherewithal to get on the wagon early; it’s now a valuable, indispensable necessity that will only grow more important as hackers find alternative ways to launch attacks.

Investors should see Okta and CrowdStrike as equally worthy of investment, as both companies are well situated to capitalize on the ever lucrative cybersecurity market.

For those more risk averse, Okta’s safe and steady business line will offer good exposure to the industry; but for those tempted by high revenue rates – and who are not put off by the inherent dangers of its make-or-break performance-based operations – CrowdStrike might just make for a better fit.

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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.