Workforce Security Giant, Okta Offers Upside

While there are many companies that have seen their share prices decline 80%, there are not many high quality companies that have experienced declines of this magnitude. Okta (NASDAQ:OKTA) caught our attention as it is company that has been very well regarded by the Street (at least until recently) and just had a major execution misstep.

As background, Okta has been a leader in workforce security which provides authentication for employees who need to access several applications. It has also been expanding into Customer Identity Access Management (CIAM), which essentially provides authentication for customers.

In March of 2021, Okta acquired Auth0, a leader in CIAM, for $6.5 billion. While the product is similar at first sight, it is aimed at completely different parts of an organization. The workforce security product is sold to CTOs and CIOs, and the CIAM product is sold to developers. Moreover, Okta had a competing product to Auth0, creating incremental confusion for its sales force and its customers.

In light of the challenges, the company brought down its billings guidance, a forward looking indicator, to 27% from 35-36% implying a meaningful step down in growth. The ensuing price reaction was not completely surprising as 20% revenue growers trade at a significantly different multiple compares to 40% revenue growers.

OKTA Valuation: EV/NTM Sales

Another interesting datapoint is that Thoma Bravo, a well regarded PE firm, recently made two acquisitions in this space (SailPoint and Ping Identity) for total consideration of $9 billion with combined ~$1 billion of expected F23 revenues (compared to Okta's $2 billion+ at ~the same enterprise value).

If Okta is able to re-accelerate growth, there would be meaningful upside both from earnings and, more importantly, multiple expansion.

Is It Possible To Re-accelerate Growth?

The end-market for identity management is one of the more attractive areas within cybersecurity. The security management category is expected to grow at approximately 15% CAGR and identity, both workforce and customer (CIAM), is expected to outgrow the underlying end market.

Technology Shift Driving Growth

Okta has been a leader in the space with limited competition. While the chart below contains several players, it is important to note that each one has a very different value proposition (e.g. Okta is a leader in workforce protection, Microsoft (NASDAQ:MSFT) works well for authenticating for Office 365, CyberArk is a leader in Privileged Access Management (PAM), and Auth0 (now part of Okta) is a leader in CIAM.

Magic Quadrant Forr Access Management

Okta has identified a total addressable market (TAM) of $80 billion based on number of potential users. This compares with the company's ~$2-billion revenue base. While the market opportunity is clearly there, it remains to be seen if the company can get back on the execution track and capture it.

Total Workforce

Okta Calculation Methodology: Workforce Identity and Identity Governance and Administration (IGA) TAM based on over 50,000 U.S. businesses with more than 250 employees (per 2019 U.S. Bureau of Labor Statistics) multiplied by 12-month ARR assuming adoption of all our current products and announced IGA products which implies a market of $21 billion domestically, then multiplied by two to account for international opportunity. PAM TAM based on internal estimates of Modern Infrastructure Access spend as a percent of Total Cloud Spend based on Gartner Forecast Analysis: Public Cloud Services, Worldwide report. $30 billion Customer Identity TAM based on 4.4 billion combined Facebook users and service employees worldwide multiplied by internal application usage and pricing assumptions.

Notes from the 2Q23 earnings call:

Notes From The 2Q23 Earnings Call