Okta, Inc. (NASDAQ:OKTA), a leading provider of identity solutions for enterprises, reported strong earnings for the fourth quarter of Fiscal 2024. In response, OKTA stock shot 23% higher on February 29 and has held up since then without losing investor enthusiasm, suggesting the company’s comeback is gaining momentum. Despite cautious spending by many businesses worldwide, Okta delivered stellar financial results and painted a rosy outlook for the upcoming quarter.
I am bullish on Okta, as I believe the company enjoys a long runway to grow.
Okta’s Response to Recent Security Threats
In October 2023, a customer support system used by Okta was accessed by unauthorized users, exposing confidential data, including the names and email addresses of the users of this system. Following the incident, Okta launched an independent investigation to look into this security breach to understand the factors that led to this event to nullify such threats in the future.
On February 8, Okta and Stroz Friedberg – a leading cybersecurity forensics firm engaged by Okta to conduct the independent investigation – concluded the investigation and reported that the impact of this breach is limited to the initial findings published by Okta last November.
As a security identity solutions provider, safeguarding customer data is paramount to Okta’s long-term success. In response to this security event, Okta has taken meaningful measures to avoid a similar occurrence in the future, including the launch of Project Bedrock and Okta Secure Identity Commitment. The company’s response seems adequate, which is evident from continued customer growth in the fourth quarter despite a setback in October.
Recent Customer Wins Solidify Okta’s Potential
Okta ended Fiscal 2024 strongly by registering a 30% year-over-year increase in million-dollar-plus ARR contracts. In the fourth quarter, Okta signed a record number of $1 million+ deals. Some of the noteworthy customer wins include one of North America’s largest telecommunication companies, a popular online gaming platform, and an existing customer that expanded into Okta’s Customer Identity Cloud to offer a new sports betting application.
The total customer base of Okta grew 8% year-over-year in Q4 to 18,950, while customers with an ARR of $100k or more grew by approximately 14% to 4,485. This continued growth of the customer base suggests Okta has recovered from the recent security breach, with customers continuing to trust its products amid uncertain macroeconomic conditions.
Further, the gross retention rate remained healthy in the mid-90s levels in Q4, according to CEO Todd McKinnon, while the net retention rate declined to 111% from a high of 120% in the fourth quarter of Fiscal 2023. This decline can be primarily attributed to the slowing pace of upsells, which should not be a concern for investors as long as the gross retention rate is not deteriorating.
Product Expansions Support Okta’s Growth Trajectory
Okta’s appeal as a potential winner of the identity and access management solutions industry stems from the company’s aggressive investments to secure a leading position in this market. Today, Okta’s investments can be categorized into three distinct areas.
First, the company has an unrelenting focus on improving the underlying security of its platform, stemming from the need to mitigate security breaches in the future. These investments will form the backbone for the company to comply with stringent regulations and attract high-value customers.
Second, the company is investing in expanding its identity platform to attract new clients and uncover upselling opportunities. To supplement its core Access Management solutions suite, Okta has introduced Identity Governance and Privileged Access – two solutions that are gaining traction among new customers.
In early February, Okta closed the acquisition of Spera Security, which will enhance the company’s product offering through improved identity security insights and technology. According to company management, Okta will engage in similar M&A activity strategically in the future to expand its product portfolio and offer customers a one-stop-shop experience in identity security management.
Third, the company is actively investing in integrating AI technology into its products, which is an encouraging sign at a time when businesses of every scale and size are looking for ways to incorporate AI into their business processes.
Okta AI is at the center of these investments. In Fiscal 2025, the company plans to leverage Okta AI to offer more intelligent login experiences by analyzing user behavior, offer more advanced threat detection and prevention capabilities, identify unusual access patterns, and recommend security policies by learning from customer data.
Is Okta a Buy, According to Analysts?
In the last three months, Wall Street analysts have boosted Okta’s upcoming Fiscal year earnings estimates dozens of times, which is a clear indication that analysts are increasingly turning bullish on the company’s prospects amid the favorable outlook for the cybersecurity sector. These positive earnings revisions are likely to result in higher price targets in the coming months as analysts factor in better-than-expected growth estimates in their models.
Based on the ratings of 33 Wall Street analysts, the average Okta stock price target is $114.94, which implies upside of 9.6% from the current market price.
The Takeaway: Okta Has More Room to Grow
Okta was quick to respond to the major security breach that came to light last October, which shows the company’s commitment to upholding high standards in the cybersecurity space. Okta continues to expand its product portfolio to widen its horizons and reach new markets and customers, which should lead to robust revenue growth in the next few years. Aided by positive earnings revisions, Okta stock is likely to maintain its current positive momentum.
