Okta (NASDAQ:OKTA) is finding itself in a challenging spot given the current macroeconomic environment. As the firm gears up to report eq1’25 on May 29, 2024, I anticipate some color as to the results of the firm’s “hunter-farmer” model and whether developing their two styles of sales approaches will be effective. Given that management leaned out operations by eliminating 400 positions in supporting roles within the go-to-market team, there may be some anticipated headwinds as it pertains to growth going forward. Management guided 16-17% revenue growth for eq1’25 with a non-GAAP operating margin of 18%, a major year-to-year improvement but a slight decline sequentially. Considering the firm’s gradual decline in topline growth rate, macro headwinds may further pressure the firm’s growth in the coming year as IT departments seek to minimize and mitigate operating costs as enterprises seek to preserve cash. I recommend OKTA shares with a SELL rating and value the shares at $88/share at 5.70x price/sales.
OKTA Operations
Management discerned on the firm’s growth strategy going forward as they are experiencing a gradual decline in topline growth. Management voiced that they are restructuring their sales department with a “hunter-farmer” model in which there will be more specialized teams to focus on the two sales approaches. With the goal of attaining new logos with this strategy, I believe segmenting the two approaches will create stronger synergies within the sales department as the hunter approach is more proactive while farming is more focused on upselling current customers. One point that makes me question management’s expected growth rate is their elimination of 400 positions in their go-to-market team.
As the firm faces a shift from their land and expand strategy to new logo approach, I believe there may be more macro headwinds than what management is portraying. One of the challenges Okta faces is fewer cross-selling opportunities as firms are not purchasing additional software seats as expected. I believe this is primarily due to companies seeking to minimize operating costs across their IT departments as firms continue to experience significant inflationary pressures. The Wall Street Journal published an article on May 20, 2024, that may add some color to this headwind. As the article reads, computer-science graduates are finding fewer available jobs as they enter the workforce. This goes along with my AI thesis as outlined in my recent report covering Nvidia (NVDA), Nvidia Faces Macro Headwinds And Micro Tailwinds, in which I anticipate companies to leverage AI/ML capabilities in order to manage down operating expenses while optimizing operations. If this thesis plays out as expected, firms like Okta may experience further headwinds in their cross-selling capabilities as fewer administrative staff will be needed to manage IT operations, which in turn will reduce the need for privileged access seats. This may affect Okta’s revenue per customer over time and force the firm to focus significantly more attention to their hunter sales team for adding new logos.
Given that Okta’s identity protection software covers identity management, privileged access, and governance, I anticipate that the firm’s more aggressive sales approach has the ability to modestly offset the lower per-customer revenue; however, this may add some pressure to margins as the firm will need to acquire more new customers to achieve a similar growth rate. Other firms like Palo Alto Networks (PANW) have voiced longer lead times and a longer sales cycle before closing new deals, which may also lead to more pressured margins for the software firm in the coming year. I believe this will also lead to continued pressure on the firm’s net retention rate as total sales value declines.
One tailwind that the management mentioned on the q4’24 earnings call was that enterprise-level firms are not cutting back on their security budgets, leading to the ability for Okta to maintain a certain baseline in revenue generation. This may allow the firm to reach new, larger customers more effectively as small-to-midsized businesses cut back on IT spend. Though refocusing their sales tactics towards larger enterprises, I do anticipate longer sales cycles for fewer seats to limit Okta’s growth rate.
Okta does have plans on expanding their Okta AI features across their identity platform. This may offer enterprises a strong automated solution to securing their Microsoft (MSFT) Active Directory and other identity-related platforms across the enterprise as firms seek to manage down costs. I believe one of the headwinds Okta may face as it pertains to this is being relatively late to the party. One question raised by an analyst was relating to platformization across security products, which I believe may be a limiting factor for Okta going forward. On a competitive basis, Okta’s software does not touch up on the entirety of the security platform as competitors like CrowdStrike (CRWD), Fortinet (FTNT), or Check Point (CHKP) have to offer. If more enterprises migrate to the single platform approach as many of the features offered, such as single sign-on by Okta, are an integrated component to these firms’ platforms, Okta may experience further headwinds in adding new enterprise-level customers.
Okta Financial Forecast
Looking ahead to eFY25 and eFY26, I anticipate a significant slowdown in topline growth paired with moderating-to-tightening margins as the firm faces a more challenging sales environment. Management did discern in their q4’24 earnings call that customer retention has not been affected as a result of their October 2023 breach. Despite this factor, attaining new customers may be more of an uphill battle as a result of the breach.
Okta Valuation & Shareholder Value
OKTA shares are currently trading at 8x TTM price/sales, a relatively low valuation when considering peer cybersecurity firms.
Using a probability approach to valuing OKTA shares, I believe OKTA shares are currently overvalued despite the relatively low valuation. Given my expectations for slowing revenue growth and operational pressures going into eFY25 and eFY26, I believe OKTA shares may experience a modest decline going into eFY25. I rate OKTA with a SELL recommendation with a price target of $88/share at 5.70x eFY26 price/sales.
Given Okta's segments within the cybersecurity space, the firm may be in a position to be acquired by a larger security platform company, similar to Symantec's acquisition of LifeLock in 2016.
Michael Del Monte
Michael Del Monte is a buy-side equity analyst with over 5 years of industry experience. Prior to working in the investment management industry, Michael spent over a decade in professional services working in industries that range from O&G, OFS, Midstream, Industrials, Information Technology, EPC Services, and consumer discretionary.Michael takes a macro-value-oriented approach to investment analysis and prides himself in being able to make investment recommendations based on cross-industry analysis.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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