Okta Faces Headwinds Amid Growing Cybersecurity Market
Okta OKTA shares are down 20.2% year to date (YTD), falling short of the broader Zacks Computer & Technology sector’s impressive return of 26.3%. The company has also struggled compared to the Zacks Internet Software and Services industry, which has seen a decrease of 7.8% during the same period.
Struggles Amidst Economic Challenges
The current tough economic climate has affected Okta’s business focus. Both the Customer Identity and Workforce Identity segments are feeling the pressure of limited budgets. In the second quarter of fiscal 2025, the trailing 12-month net retention rate fell to 110%, representing a 5% drop from the previous year.
Strength in the Product Portfolio
Despite the challenges, Okta’s product offerings remain strong. There is notable demand for new services like Okta identity governance and Okta privileged access. The expanding customer base, fueled by the adoption of its Identity Threat Protection solution, is a positive sign for investors focused on growth.
Okta AI, which integrates AI capabilities across both Workforce Identity Cloud and Customer Identity Cloud, empowers organizations to utilize AI in enhancing user experiences and safeguarding against cyber threats.
Forecasts show that Okta’s revenues may grow at a compound annual growth rate (CAGR) of 25% from fiscal 2022 to fiscal 2025, with a 7.7% increase in customer count during fiscal 2024 compared to fiscal 2023.
Year-to-Date Performance
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Growing Demand for Identity Solutions
The surge in global security breaches underscores the critical role of cybersecurity providers like OKTA. According to IDC’s recent report, worldwide revenues from security products reached $106.8 billion in 2023, a rise of 15.6% from 2022. Microsoft MSFT leads with an 11.6% market share, followed by Palo Alto Networks PANW at 5%.
The greatest growth has been seen in Cloud Native Application Protection Platforms, largely supplied by CrowdStrike CRWD and Palo Alto Networks, which grew by 31.5% year-over-year. Identity and Access Management (IAM) also posted strong growth at 21.4%.
IDC anticipates that the global security market will continue to grow in double digits over the next five years, with revenues expected to hit $200 billion by 2028. IAM is projected to be one of the fastest-growing segments, expected to grow at a CAGR in the teens or higher from 2024 to 2028.
The demand for secured remote access and enhanced protection in light of ongoing digital transformation trends favors Okta’s future growth.
As of the end of the third quarter of fiscal 2025, Okta’s total customer count rose by 5% year-over-year to 19,300. Customers with Annual Contract Values (ACV) exceeding $100K increased by 10% to 4,620. Its fastest-growing customer segment includes those with ACV above $1 million, with Okta serving over 40% of the Global 2000.
Okta’s impressive portfolio is enabling it to capture market share in the cybersecurity sector, competing effectively against giants like Microsoft, IBM, and CyberArk.
Positive Outlook for Fiscal 2025
Looking ahead, Okta’s innovative lineup positions it well for growth.
For fiscal 2025, Okta projects revenues between $2.555 billion and $2.565 billion, a raise from earlier estimates of $2.53-$2.54 billion. This projection signifies a 13% increase over fiscal 2024.
The Zacks Consensus Estimate for fiscal 2025 revenues stands at $2.56 billion, marking an expected year-over-year growth of 13.19%.
Moreover, OKTA anticipates non-GAAP earnings for fiscal 2025 between $2.58 and $2.63 per share, up from previous guidance of $2.35-$2.40. The consensus for earnings is set at $2.61 per share, reflecting a slight uptick and suggesting a significant increase of 63.13% compared to fiscal 2024.
Okta, Inc. Price and Consensus
Okta, Inc. price-consensus-chart | Okta, Inc. Quote
The projected free cash flow margin for fiscal 2025 is approximately 23%.
Stock Valuation Concerns
Despite these positive signs, Okta stock appears to be expensive. It currently holds a Value Score of F, indicating a potentially stretched valuation.
Presently, the forward 12-month Price/Sales ratio for OKTA is 4.47X, noticeably higher than the industry average of 2.68X.
Price/Sales Ratio (F12M)
Image Source: Zacks Investment Research
In Summary
Okta’s strong product lineup continues to expand its customer base, benefiting from a favorable industry environment with increasing demand for identity solutions.
Currently, OKTA holds a Zacks Rank #1 (Strong Buy) and has a Growth Style Score of B, indicating it could represent a compelling investment opportunity based on Zacks’ proprietary methodology. The complete list of today’s Zacks #1 Rank stocks can be found here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
