Okta, Inc. (OKTA), a global leader in cloud-based identity management solutions, has lost more than 20% of its market value since Aug. 29 despite reporting decent quarterly earnings. Consequently, the company is facing several short-term headwinds that have contributed to a deceleration in growth, but its long-term prospects are bright as the addressable market opportunity continues to expand. Encouragingly, the macroeconomic outlook facing Okta is beginning to improve, paving the way for a growth revival in the next 12 months. Therefore, I am bullish on Okta stock as I believe the market has misunderstood the company’s massive growth potential.
Okta Expands Market Opportunity
I remain optimistic about Okta’s future despite its recent market performance. Specifically, the company’s lackluster performance in the last few trading sessions was triggered by the release of its Q2 FY2025 earnings, which showed a year-over-year revenue growth of just 16%. This is a notable decline from the average quarterly revenue growth of over 23% seen in the previous financial year. In particular, this slowdown primarily stems from weak IT spending by small and medium-sized businesses (SMBs) amid inflationary pressures and elevated interest rates.
Although Okta has been aggressively acquiring large-scale customers in the last couple of quarters, it still relies heavily on SMBs, as large enterprises account for less than a fourth of Okta’s total customer base of 19,300.
According to Precedence Research, the identity and access management solutions market was valued at $18.12 billion in 2023 and is expected to grow at a healthy CAGR of 13% through 2033 to be valued at $59.52 billion. This growth will come on the back of the increasing adoption of remote work, the gradual shift of global corporations to a cloud-native environment, and the integration of advanced technologies such as AI which calls for robust cybersecurity frameworks to protect sensitive data.
For instance, Okta’s product suite is carefully designed to help businesses remain secure in an increasingly connected world. In particular, Okta’s Single Sign-On allows users to securely access company applications with a single set of credentials and the company’s Multi-Factor Authentication solution safeguards confidential data by requiring users to provide a one-time password in addition to security credentials to access high-risk documents and data.
Furthermore, in addition to these cloud-focused security solutions, Okta also offers Workforce Identity solutions and Customer Identity solutions, catering to all the possible requirements of a corporate client.
Okta Strengthens Market Position
Nevertheless, I am confident in Okta’s ability to outperform its competitors in the long run, even as the market for identity and access management solutions becomes more crowded. Indeed, the growing opportunity in this space has attracted several big tech giants, including Microsoft Corporation (MSFT) and Alphabet Inc. (GOOG). Microsoft’s Azure Active Directory, commonly known as Azure AD, has emerged as a formidable competitor to Okta in recent quarters. However, a closer examination of the products offered by Azure AD and Okta suggests that Okta is well-positioned to dominate this market in the long term.
A key differentiator between Azure AD and Okta is the vendor neutrality of Okta’s products which enable them to seamlessly integrate into more than 5,000 different applications across any kind of software provider. In comparison, Azure AD is designed to lure users into Microsoft’s ecosystem, which limits its addressable market opportunity.
Moreover, product reviews from customers suggest Okta’s functionality is superior compared to Azure AD when it comes to addressing complex, comprehensive identity solutions needs of large-scale customers. Consequently, Okta is leveraging this to transition from an SMB-oriented security solutions provider to an enterprise-focused vendor, which should lead to reduced revenue volatility in the long run. Additionally, maintaining strong relationships with large-scale enterprises should create upselling opportunities for Okta.
Indeed, Okta’s customer acquisition trends in the second quarter of Fiscal 2025 reveal the company is already making progress in attracting high-value customers. Okta ended the quarter with 4,620 customers with more than $100,000 in annual contract value after securing 70 net new additions during the quarter. Although this business transition may lead to some friction in the short run, the company’s focus on long-term growth is commendable.
Okta Capitalizes on International Expansion
For this reason, I remain bullish on Okta’s growth potential, particularly when considering its untapped opportunities for international expansion. In Q2, Okta generated $137 million in revenue from international markets, which accounts for just 27% of its total revenue—a sign that there is plenty of room to grow. Since 2020, the company has made strides to penetrate global markets by launching domestic AWS infrastructure in Japan, opening its first office in Germany, and acquiring Auth0. Additionally, as revealed during an earnings call last week, Okta is focused on building strong relationships with channel partners to fuel its global expansion. This strategy bolsters my confidence in Okta’s ability to capitalize on emerging opportunities abroad.
Given Okta’s ambitious international expansion strategy seems prudent considering the exponential growth in cloud adoption among global companies. According to Edge Delta data, around 94% of global businesses are now using cloud computing solutions at least for one business aspect. This year alone, global spending on public cloud is expected to grow more than 20% to $679 billion as these investments are considered mission-critical by both the government and private sector.
Is Okta a Buy, According to Wall Street Analysts?
Nonetheless, Okta’s deceleration in growth discussed earlier in this analysis has spooked many Wall Street investors. For example, Canaccord Genuity slashed its Okta price target to $90 from $95 last week citing the lackluster growth in remaining performance obligations projected by the company for the next quarter. However, Canaccord believes Okta is well-positioned to capture a meaningful share of the $80 billion addressable market for identity security.
Similarly, Canaccord is not alone in slashing price targets for Okta. Baird, Scotiabank, and Wells Fargo also trimmed their price targets for Okta following the quarterly report last week citing the risk of a continued deceleration in revenue growth in the foreseeable future. One thing analysts agree on is Okta’s long-term potential when industry conditions turn conducive to growth.
Based on the ratings of 27 Wall Street analysts, the average Okta price target is $114.18, which implies upside of more than 50% from the current market price.
I believe the market has not rewarded Okta for its long-term growth prospects primarily because of short-term headwinds that cloud the judgment of many investors. As analyst ratings also suggest, the company seems deeply undervalued today, presenting an opportunity for long-term investors.
Key Takeaway
Okta is going through a rough patch with growth decelerating amid macroeconomic challenges and the company’s transition to focus on high-value customers. However, long-term prospects seem bright for several reasons, including the favorable expectations for the identity and access management solutions market, Okta’s international expansion, and the company’s strong competitive position. Okta, trading at a substantial discount to the average price target of Wall Street analysts, is an attractive investment opportunity in the cybersecurity sector.
