Okta - Valuation relative to others

Investment Analysis Clubs Saul’s Investing Discussions
1

I was going through my portfolio and comparing TTM revenue growth and EV/S and noticed that Okta stood as a major outlier when it came to revenue growth and EV/S. Specifically, Okta has a 28.x EV/S with a 51% TTM revenue growth. Compared to MDB at 21.x with 66.5%, SMAR at 20.x and 55.9%, ZS at 17.53 and 59.2%, etc.

We’ve discussed FCF as a future valuation metric where it makes sense to use that for a CRM or a TEAM, but for Okta, their FCF Margin was only 10% in Q1 and it went down to negative in Q2.

Bear had brought up EV/GP, so looking at that metric relative to our other favorites:


Ticker       Mkt Cap     TTM Gross Profit    P/GP ratio     ...and P/S (for comparison)
TWLO          13.8b            542m             25.4              13.7
MDB            7.1b            238m             29.8              20.5
ESTC           5.5b            216m             25.4              17.9
ZS             6.1b            243m             25.1              20.2
AYX            6.6b            317m             20.9              18.9
OKTA          14.1b            371m             **38.0              28.8**

Okta’s DBRR isn’t anything overly impressive too and if anything it’s trending downwards:
118, 119, 120, 120 (most recent first in TTM)


From a revenue growth rate:
	Q1	Q2	Q3	Q4
2019	59.81	56.97	57.79	49.86
2020	49.75	48.52

I’m forecasting $153.2 M in revenue for Q3 (they generally add about 10-15 M in revenue sequentially and I’m increasing services slightly) which would be a 45.11% growth in revenue which I think is moderate/aggressive since they themselves forecasted only 143 M (which I think was a sandbag at 37%)

Okta isn’t profitable either and if anything, their losses are increasing despite increasing revenues. However, their gross margin has increased sequentially it appears and is in the low 80s which is great.

Their glassdoor ratings are fine, they’ve held steady despite being public for quite some time which generally may have an impact on company morale. Todd McKinnon seems like a good CEO too.

I am incredibly bullish on the IAM industry but I don’t think it justifies this type of extreme valuation and the last thing I would want is another Zscaler type of meltdown from high 30+ multiple to high teens multiple. In some weird way, Okta has some similarities with Zscaler.

So what am I missing on Okta which makes them have such a higher valuation than some of our other stocks especially as a company that is growing at ~45-50% but is showing a slight slowdown in revenue growth?

50 Likes
2

One possible cause is vendor lock in and stickiness. The complexity of the product and how deeply embedded it is makes it less likely a customer will leave Okta. This makes their sales worth more. On top of this they can now upsell to these established customers with new products, which management is saying are supposed to accelerated revenue growth (they’re running out of time there).

2 Likes
3

Another thing to consider is the growth in big accounts recently.

When these large companies sign on, they don’t just dip their toes, they go for multiple products across much of their workforce. That’s obviously good for OKTA and shareholders, but there are two things to remember:

  1. Those big contracts will never bump up DBRR, as there’s little to add to their offerings if they start out with most of them – for most of their employees/customers.

  2. Because it’s subscription revenue, it gets recognized over time.

I’ve started paying more attention to remaining performance obligations (RPOs), as it is the amount of contracted (nearly guaranteed) revenue they have. This jumped 68% year over year last quarter. Throw in that stickiness and you might have a different opinion (or not :slight_smile: )

I don’t think you’re totally off-base for believing it’s expensive, just throwing out other considerations.

Best,
Brian
Long OKTA

27 Likes