Okta

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Okta, Inc. is a leading identity provider, offering a cloud platform that secures and manages access to applications, devices and user data, catering to organizations of all sizes, globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Okta operates within the identity and access management (IAM) space, providing a comprehensive suite of cloud-based solutions. They have two core offerings: Workforce Identity Cloud and Customer Identity Cloud. Workforce Identity Cloud is focused on helping companies manage their employees’ access to various applications and services in the digital workplace. Customer Identity Cloud, meanwhile, helps companies manage customer access to applications and websites.

  • Revenue Distribution: Okta generates revenue primarily through subscription fees based on their cloud-based platform, and professional services fees. Subscription revenue accounts for the majority of Okta’s total revenue. In the three months ending Oct 31, 2023, subscription revenue reached $582.5 million, while the revenue from the professional services and other, reached only $64.1 million.
  • Industry Trends: The IAM industry is experiencing rapid growth driven by increased adoption of cloud applications and the heightened need for robust cybersecurity solutions. Companies are increasingly adopting zero-trust security frameworks, making IAM solutions essential. This creates a strong demand for Okta’s services.
  • Margins: Okta’s gross profit margin was 76% for Q3 2024, compared to 78% in Q3 2023 and net margin was a negative -31% due to high operating expenses.
  • Competitive Landscape: The IAM market is highly competitive and fragmented, with several large players such as Microsoft, Ping Identity, and ForgeRock. Numerous smaller players focus on niche markets, thereby intensifying competition.
  • Differentiation: Okta distinguishes itself with its focus on cloud-based solutions, robust security features, a strong product suite, ability to integrate with legacy systems, and its focus on providing a platform for both workforce and customer identity. They have a strong developer ecosystem. Additionally, Okta’s platform is designed for organizations of all sizes.

Recent Concerns / Controversies and Problems:

  • Guidance Reduction: In a significant adjustment, Okta lowered its full-year revenue guidance in its Q3 2024 earnings release. This adjustment is primarily driven by slower-than-expected growth in the large-enterprise market and lengthening of sales cycles. Okta has cut their workforce due to slower sales.
  • Cybersecurity Incident: A significant cybersecurity incident in late 2023, which caused some customers to lose access to their services for multiple hours. While this was resolved, it did raise concerns about the resilience of the company’s services and may have caused customers to reconsider Okta’s security measures. Okta still faces several legal and regulatory challenges. In May 2024, A class action lawsuit brought against Okta due to its data breach. These actions do not appear to affect the core business.
  • Leadership Changes: In April 2024, the founder and CEO of the company, Todd McKinnon, gave away his co-chief status and became the Chairman and CEO.

Financials Deep Dive:

  • Revenue Growth: Despite the lowered guidance, Okta is still growing. Subscription revenue for Q3 2024 grew 16.8% YoY to $582.5 Million.
  • Operating Expenses: Okta’s operating expenses are high. Research and development, and sales and marketing, are each about 40% of total revenue. General and administrative expenses are about 20%. Stock based compensation is included in these expenses.
  • Net Income: Okta currently operates at a loss, primarily driven by its high operating expenses. The net income margin of Q3 2024 was a negative -31%.
  • Cash Flow: Okta is currently generating a positive operating cash flow. For the nine months ended Oct 31, 2023, the operating cashflow was 402 million, while for the same period of 2022, the cash flow was 116. The increase in cashflows is mainly driven by decreased net losses.

Moat Analysis: 3/5

  • Network Effects: The network effect for Okta is present but not as strong as in a social networking or payment platform. Larger amounts of integrations with more partners increase value to customers, but the network effect only plays a limited role in building a very strong moat.
  • Switching Costs: While Okta has some switching costs in terms of integrations and retraining employees, the level of customer loyalty is not extremely high, as customers can easily evaluate competitors in the market. Customers don’t always feel they have a very high “lock-in.”
  • Intangible Assets: Okta has a large number of patents but they do not have a demonstrated history of innovation. Also, brand recognition as a leader in identity is good, but does not seem to give Okta significant pricing power.
  • Cost Advantages: Okta is not a low cost provider.

Legitimate Risks that Could Harm the Moat

  • Competitor Disruption: Competitors with stronger brand recognition, or with a better strategy and more resources, may disrupt the space. Also, more aggressive pricing from competitors can erode ROIC.
  • Technological Disruption: Rapid advancements in technology can render some of Okta’s products obsolete. Okta also may not be able to keep up with the competition’s pace in innovative solutions.
  • Macroeconomic Conditions: General economic downturns or recessions can lead to decreased spending, especially by smaller companies.
  • Cybersecurity Threats: Major security breaches can damage Okta’s reputation, and the customers may also consider alternatives.
  • Data Privacy Regulations: Regulatory changes to data privacy can create new compliance obligations and costs. The cost of compliance can reduce profits, making smaller players more competitive.

Business Resilience

  • Okta’s business is still somewhat resilient to the downturns and recessions that occur in the markets, as it can scale and serve both large and small clients. They also provide essential tools that are heavily relied upon, especially in the workplace, which reduces churn risk. They are trying to become more profitable and to have higher revenue and margins, which makes them a solid long term choice.
  • However, the moat isn’t very strong, so their position in the industry could shift with new competition.
  • Okta has been dealing with large companies, which tend to have slow sales cycles, but a solid pipeline may provide enough revenue.

Understandability: 3 / 5

Okta’s business model is somewhat complex and hard to wrap one’s head around. Their cloud-based platform is intricate, and its various applications can be challenging to understand. However, if you have a deep understanding of data security and IAM solutions, understanding this business is fairly straightforward.

Balance Sheet Health: 4 / 5

Okta’s balance sheet is relatively solid. The company holds a large sum of cash and short-term investments of 2.6 billion. It has also generated a positive operating cash flow and has a relatively conservative debt level. However, the company’s large operating expenses and negative net income is a reason for concern.

Conclusion Okta is a solid player in the IAM market, and has a good potential for further growth. However, it may have some issues. Management seems to have a good long term outlook and seems prepared to navigate headwinds. Overall it is a fairly strong company with good fundamentals and growth potential.