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What Makes OKTA Stock a Solid Bet Is both Growth and M&A Potential

Luce Emerson

Okta is not a household name Okta (NASDAQ:OKTA). It’s clients are though. Over 6,100 organizations across industries, including Nordstrom, Inc. (NYSE:JWN), Slack, and Teach for America, use Okta to protect and manage the identities of their workforces and customers. Although this doesn’t tie Okta stock to those companies’ fortunes, it does give one a sense of its reach.

Okta Stock

From a technical perspective, investors might look to that 20-day moving average for resistance, which it bounced nicely off of early last week. Overall, OKTA stock has proved resilient. The company’s YTD and 3-month returns speak volumes: 72 percent and 34 percent, respectively.

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More telling is that in the past one month, when trade war headlines have caused market turmoil, bringing the NASDAQ down almost 3 percent, OKTA stock has returned close to 15 percent. When it comes to picking winners, buying strength is a good idea in the late stage of the business cycle.

OKTA Stock Finishes 2019 with a Bang

Okta’s performance has been driven by real results and focused execution.

Okta grew revenue grew 56 percent year-over-year. Importantly, subscription revenue grew 57% year-over-year. Recurring revenue increases indicate more stable income streams and new customers, demonstrating that their product continues to gain traction. In the fourth quarter, Okta saw a 50 growth in customers with over $100,000 annual recurring revenue. This is finishing off the fiscal year in extremely good form.

Okta’s investments in their early platform and the Integration Network have paid off. Increasingly, large corporate customers are going to Okta as the identity standard for both their workforce and customers. The Okta Identity Cloud is uniquely positioned to both help organizations realize their digital transformation initiatives and adopt a Zero Trust security posture.

Q4 operating cash flow margin improved 860 basis points year-over-year; free cash flow margin improved 690 basis points year-over-year. Improved pricing and volume should result in continued margin increases.

For the full year fiscal 2020, the company expects to grow revenues at a rate of 33 to 34 percent year-over-year. This is readily achievable and perhaps even on the conservative side.

Okta Stock TAM Is Unlimited

For the workforce, it used to be that identity was part of the stack. Currently, it is an independent and neutral platform. In the future, it will be an integrated, universal platform, and Okta is primed to be that provider.

The cloud has changed everything on the customer side as well. It used to be that companies built identity management platforms themselves. Now, it has become a microservice with many providers. In the future, the trend is moving toward one standard, just like with the concept for the workforce.  Here again with its hyper focus on its customer experience, the numbers prove that Okta is well-positioned to be that standard.

Overall, the addressable market is huge. Enterprises and consumers covers everyone. So, that executing on that vast addressable market leaves ample growth runway for the company. Network effects are at play and should accelerate that expansion.

M&A Potential

Given OKTA’s expansion and the popularity of its Active Directory, there a decent chance of OKTA stock getting acquired. I would put odds at fifty fifty that this catalyst occurs in the next few years. Something to keep in mind, at any rate.

Recall that just last year Salesforce (NYSE:CRM) acquired MuleSoft, a similarly cloud-neutral company that built application networks. Its Anypoint Platform ended up becoming a part of the Salesforce Integration Cloud.

At this point, Microsoft Corporation (NASDAQ:MSFT) would be a likely buyer. Both companies have similar philosophies on cloud and on-premises software, and under new management MSFT has demonstrated over the past several years that it has shifted its stance from away from an ultra proprietary attitude.

 As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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