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Okta Mid-Year Report Card: Growth Is Nowhere Near Tapped Out Yet

Nicholas Rossolillo, The Motley Fool

Cybersecurity has been a hot investment over the last few years. Organizations around the world are increasing their reliance on digital operations, and that has created a massive demand for services to keep it all secure. Cloud-based computing, in particular, has been increasing by double digits, further complicating the security picture for consumers and business operations alike.

A new breed of cybersecurity companies born on and addressing the cloud has thus been outpacing the industry as a whole. Okta (NASDAQ: OKTA) is one of them, specifically addressing the "privileged identity management" (PIM) niche of the security universe. Niche though it may be, this software outfit is proving it can address one of the more sensitive pain points businesses have when it comes to keeping their data on lockdown.

A laptop, smartphone, and cup of coffee sitting on a table overlooking a bank of windows.

Image source: Getty Images.

Highlights at the halfway point of 2019

Long gone are the days when staff are only doing work at the office. Many employees now access work information remotely and from any number of devices. Okta's PIM helps fill the myriad gaps that a decentralized work environment presents. It's proving to be a powerful solution, and since its 2009 founding, Okta has grown into one of the largest companies solely focused on cybersecurity out there with a market cap valuing the company at more than $14 billion.

As reported in its Wednesday earnings report, Okta's torrid growth continued in the second quarter of 2019, with revenues increasing 49% from a year ago to $140.5 million. Adjusted net losses narrowed to $5.51 million compared with a $16.4 million loss in the second quarter of 2018. The top line handily exceeded management's guidance for growth of 37% to 38%, and paired with first-quarter results, Okta is showing little sign of slowing.

Metric

Six Months Ended July 31, 2019

Six Months Ended July 31, 2018

Change

Revenue

$266 million

$178 million

49%

Gross profit margin

72.2%

70.6%

1.6 pp

Operating expenses

$287 million

$189 million

52%

Net income (loss)

($94.9 million)

($65.2 million)

N/A

Adjusted earnings (loss) per share

($0.24)

($0.25)

N/A

Data source: Okta. Pp = percentage points.

Keeping enterprise identity safe, secure, and unique to you

In its latest report, Okta updated its full-year guidance, now calling for total revenue of $560 million to $563 million, representing 40% to 41% year-over-year growth. First-quarter projections were for 36% to 37% year-over-year growth. With Okta's price-to-sales ratio currently sitting at a lofty 28.8, Wall Street is pricing in many years of double-digit expansion. Okta issued a cautious outlook, but there are a few reasons to believe the company will keep growing fast.

First, CEO and co-founder Todd McKinnon cited the latest Gartner "magic quadrant" for PIM on the second-quarter earnings call. This is an independent scorecard comparing various service providers against peers. Okta was far and away listed as the leader in PIM, with identity management available on Microsoft's Azure cloud platform a distant second. Kudos to Okta for that ranking.

Second, this leadership recognition is translating into momentum for Okta, especially when it comes to inking deals worth at least $100,000. McKinnon said that "when looking at the top 25 contracts booked in Q2 by total contract value, the average contract size doubled when compared to Q2 last year." Put simply, an increasing number of large organizations are putting Okta to work on keeping their operations and employees safe.

And finally, there's the outlook for the PIM niche of the cybersecurity industry itself. Various researchers, including one from ResearchAndMarkets.com, project global identity management spending will increase by more than 30% yearly for the next few years. ResearchAndMarkets.com expects total spending to top $16 billion a year by 2027 (it's currently at $1.5 billion yearly). Those projections may or may not become fact, but they underscore the tailwind that is propelling Okta higher right now.

Is the stock priced to perfection? With its market cap already close to the future PIM market's total size, it probably is. But then again, Okta has been able to outpace its peers in terms of growth for some time, carries a lucrative gross profit margin on services of well over 70% and still climbing, and it is keeping its foot on the gas to maximize its opportunity.

Investors would do well to make small purchases of this stock incrementally over time to take advantage of the inevitable dips (like the one immediately following the second-quarter report). But all indications are that Okta is still going strong and has a bright future ahead.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Microsoft and Okta. The Motley Fool owns shares of and recommends Microsoft and Okta. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com