Okta(NASDAQ: OKTA) stock has been disappointing investors in recent years as the company's growth has slowed from the pace it reached during its pandemic-era boom. Shares of the identity and access management technology leader are down by about 75% from the all-time high they touched in 2021, and down about 19% year to date.
Those results may look discouraging, but the underlying trends for Okta's business offer several reasons to remain optimistic that a turnaround could be on the horizon. The company is finally delivering positive earnings with an initiative to leverage artificial intelligence (AI) as a new growth driver supporting a positive outlook.
Let's explore whether Okta stock deserves a buy rating now.
Achieving profitability at last
Cybersecurity player Okta is recognized as a pioneer in the arena of cloud-based identity and access management (IAM), which helps organizations verify user identities and control accessibility to applications, devices, and sensitive data. This area of the software-as-a-service (SaaS) space is not necessarily the most glamorous. Still, it plays a critical role as an organization's first line of cybersecurity defense and helps improve workflow.
The rise of remote work in recent years with users accessing networks through an array of devices made Okta's platform more important than ever. The trends have been impressive. From fiscal 2020 to fiscal 2024 (which ended in January 2024), Okta's revenue grew at a compound annual rate of 40%. On the other hand, its slowing growth rate over the period pushed back its timeline for reaching profitability, which helps explain the bulk of the stock price volatility in recent years.
In its fiscal 2025 second quarter (which ended July 31), Okta posted a 16% annual revenue increase -- solid, but not quite the hypergrowth level it was delivering a few years ago.
However, the company made strides in controlling its expenses, and in fiscal Q2 booked its first-ever quarterly net income profit on a GAAP (generally accepted accounting principles) basis. Meanwhile, adjusted earnings per share (EPS) more than doubled year-over-year to $0.72. Okta also generated free cash flow of $607 million in its past four quarters.
OKTA Operating Revenue (Quarterly YoY Growth) data by YCharts
Okta management is citing the strength in business from its cohort of large customers that generate more than $1 million in annual contract value. Its net retention ratio of 110% reflects that, on average, Okta's established customers are spending 10% more on its services than they did a year ago.
For the fiscal year, Okta expects annual revenue growth of around 13%, and forecasts EPS of between $2.58 and $2.63, which would be a 63% increase at the midpoint from fiscal 2024's result.
Artificial intelligence as a new growth driver
A key point to consider when analyzing Okta as a potential investment is that, beyond its underperforming stock price, its fundamentals are strong. Okta believes it operates within a $80 billion total addressable market with an ongoing international expansion that's still in the early stages.
Maybe the most existing development this year has been the launch of Okta AI, a suite of AI-powered capabilities that enhance security and efficiency through smart automation and real-time recommendations. The expectation is that this innovation will further differentiate Okta from the competition and support the company's growth by adding to its value proposition and consolidating its leadership in the IAM niche.
Image source: Getty Images.
One thing I like about Okta is the company's pure-play IAM positioning, which captures high-level themes in both cybersecurity and more general business-productivity SaaS.
The stock trades at 28 times year-ahead consensus EPS, and that forward price-to-earnings (P/E) ratio stands out as a relative bargain next to comparable online security companies and cloud-computing names. Stocks like CrowdStrike, Cloudflare, Zscaler, and DataDog collectively trade at large premiums to Okta by several metrics. My interpretation is that Okta shares are undervalued.
The bullish case for Okta is that the company could reaccelerate its growth into 2025 at a faster pace than expected. That could induce the market to reprice the stock with valuation multiples more in line with those of its industry peers.
OKTA PE Ratio (Forward) data by YCharts
Decision time for Okta stock
In my view, Okta stock deserves a buy rating. For investors with a long-term time horizon, a position accumulated gradually by dollar-cost-averaging to mitigate timing risk could be a good fit within a diversified portfolio. Monitoring points over the next few quarters include trends in the operating margin and subscription revenue.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, CrowdStrike, Datadog, Okta, and Zscaler. The Motley Fool has a disclosure policy.
