Bear's Okta JanQ Review

[HermioneW]

Saul,

I got what you are saying. SaaS companies have minimal incremental cost once they sign up the customers thus every extra dollar of revenue from that customer goes straight to the bottom line. I also got that they focus on landing the customers by maximizing spending at current stage.

Now, I am trying to understand deferred revenue you mentioned. For SHOP, 2017 rev $673M from Income Statement and deferred rev $11M from Cash Flow statement. AYX: Rev $131M vs. Deferred rev $40M. OKTA: Rev $49M vs. deferred $14M. I was hoping the deferred rev will be WAY bigger than rev. Maybe I am not looking at the right place?

How do you estimate a company’s approximate value? Take SHOP for example. It has been growing 100% for several years and now about 75%. Lets say it can keep growing at 45% in later years. Since earnings are not the best yardstick, I am using CFFO as a substitute. $8M + $38M Bear says as cash loan to merchants = $46M. At market cap of $15.6B, with cash flow of $46M growing 45% a year, it will take about 7 years to get to a more “conventional” P/CF ratio of 25.

My question is, Saul, how do you know this is an investment opportunity? By looking at rev (recurring rev) growth for sure. and then comparing it to what? No P/E to compare to. Even use p/CFFO of 341 ($15.6B mkt cap/$46M CFFO)? Could you shed some light on how you evaluate?

Love your generous teaching/sharing!!!

[SaulR80683]

I was hoping the deferred rev will be WAY bigger than rev.

Hi again Hermione,
Some companies may pay six months, or a year, or more in advance to get price discounts. Most probably pay quarter by quarter and don’t mind paying a little more.

How do you estimate a company’s approximate value? Take SHOP for example.

I think that you are asking for a value oriented way of estimating what the price should be. I don’t have one. What I can see is that Shopify basically at present has no challengers of significance. If you are a company who wants to set up an ecommerce presence, you use Shopify, period. And it’s getting more and more large enterprises (dollars from them growing at over 100%). I can’t read the future, but I’ll ride with it for now, for sure.

I think we get spoiled by having so many rapidly growing companies. I used to look for companies that were growing revenue by 20%, or at most 30%. In the “real world” companies don’t grow revenue by 100%, or even by 70%, for four years running, or even one year, unless they are just beginning and starting from zero. Especially revenue that will stick, that’s recurring revenue. Companies growing as fast as Shopify and Alteryx are an incredible new phenomenon, a result of the explosion of data, the internet, and artificial intelligence.

I hope that helps although it doesn’t answer your question.

Best,

Saul

[dumaflotchie]

Hey Bear and ALL:

I am not so sure OKTA is a great investment at this time.

Looking at various articles, I see that “identity and access management” is expected to grow 13% CAGR to $15 Billion in 2021…that part looks OK but:

Just seems odd to me that they would be reporting a rather marked deceleration in revenue at this early time. I see that Bear thinks they are sandbagging…that is a very big sandbag!..maybe but I just don’t see how they wouldnt have better visibility when we are discussing a known 13% CAGR in this sector.

On top of that, the stock has run up dramatically with a very high P/S in the face of that revenue deceleration…not a good combination IMO. P/S of 16 in the face of decelerating revenue growth…ugh. Alternatively, other high P/S stocks seem to be maintaining their revenue growth (SHOP fo example).

There is also some serious competition in CA, ORCL, MSFT and IBM but I get that these don’t really offer a cloud solution so they may not be much competition ever or for some time.

But there is much more concern recently about AWS and its SSO product…this being the largest cloud provider by far (47% market share) and offered for free to AWS customers.

I thought this article and the accompanying blog post on SSO was particularly concerning for OKTA in that regard:

https://seekingalpha.com/article/4131403-okta-competition-aw……

SSO is free and it has very similar functionality. Furthermore and importantly, this article states that switching away from OKTA is not that challenging or disruptive to a business…there isn’t the same stickiness that certainly one would have when we talk about databases.

So in my initial admittedly cursory review, I think the actual bear case wins at this time including the following elements of concern:

1. The stock is very richly valued at a time when it is guiding a major deceleration in revenue growth (whether it is real or sandbagging).
2. AWS SSO product is free and this is the largest cloud provider (47% market share) by a VERY wide margin…convenience has to be a factor as well for its customers.
3. Switching costs and disruptions to a business appear to be minimal (at least according to the blog post)
4. The TA doesn’t apppear favorable in the near term

For me, not something I would invest in at this particular time under the above 4 circumstances especially with so many, much more optimistic opportunities. Unless there is some evidence of these 4 elements being grossly mistaken (not opinion but evidence)…the probabilities suggest deploying money elsewhere.

Just my 2 cents FWIW…but I could be completely mistaken…just playing odds.

[PaulWBryant]

But there is much more concern recently about AWS and its SSO product…this being the largest cloud provider by far (47% market share) and offered for free to AWS customers.

Duma,

Thanks for bringing this up. Definitely something to watch. I think the COO was specifically addressing this on the call, though he didn’t name Amazon, just “platform players.”

So obviously, when you have these very large market opportunities, there is going to be competition. You mentioned some of them. There’s also some of the platform players that are traditionally trying to bundle some of their applications together. So I think that the reason that we’re seeing a lot of success and we’re very fortunate in the business are a couple of the key characteristics of the Okta Identity Cloud, specifically and in particular, independence, I think, is very important. As we talked about, a lot of these large enterprises that are deploying applications, they’re doing it in a best-of-breed world, so they’re picking the best collaboration apps, the best enterprise mobility apps, whatever the case may be.

And we – obviously, our mission is to enable any organization to use any technology, right? So when you do that, we’re not beholden to any product suite, and we can really play that role of swizzling across operating systems, across networks, across devices, across applications. And I think that really has played to our advantage. Specifically when it comes to competition, we have not seen any change in competitive rates. Obviously, we’re paranoid folks, right? We’re also always watching the survey carefully. But we continue to be very fortunate and have a lot of success in the market, and nothing’s really changed on that front.

In the end, either Okta’s independent platform will continue to be sought, or it will not. Right now, Okta’s numbers all look very positive, evidence that they’re winning, as they say. Of course that can change, but we’ll just have to see. As the Seeking Alpha article you link to points out, Okta is the leader and has seamless functionality and a rich feature set. I don’t know how sticky this will be, but I imagine it’s worthwhile to some, as well as the independence management highlights.

One reason I have adopted Saul’s method of gradually wading into stocks, especially small companies with lofty multiples, is that it gives me time to get the bigger picture – and to make sure that story stays the same over several quarters. I wouldn’t feel comfortable with a large Okta position right now, but I feel very comfortable with my small position. If it should drop, that would be an opportunity to add, or re-evaluate, depending on what has changed.

So far, management says nothing has changed. Let’s keep watching.

Bear