Okta

Okta reported second-quarter earnings, with sales up 11% to $805 million and operating margins expanding 770 basis points to 13%. The firm's forward-looking sales metric, remaining performance obligations, grew 17% to $4.9 billion.

Why it matters: Agentic identity will be a crucial part of the overall security architecture going forward. We believe Okta can leverage this megatrend to grow its identity security and governance business. The firm is already seeing traction, with new products including Okta for artificial intelligence agents and identity governance making up 30% of new bookings in the quarter. We see this agentic identity story playing out over the next few years, with Okta as a clear beneficiary. Relatedly, we are seeing increased cyber budgets as companies seek to bolster their security apparatuses against increasingly capable AI models. We see this "arms-race-type" scenario also boosting demand for Okta's identity security products.

The bottom line: We are raising our fair value estimate for no-moat Okta to $200, from $124. Our massive fair value hike reflects our view that Okta stands to gain materially from agentic identity security adoption. Despite our fair value increase, our valuation implies a next-12-month enterprise value/sales multiple of 10.5, in line with the median multiple in our cyber coverage. We view Okta as undervalued relative to our updated valuation, even after accounting for the large after-hours uptick in its share price. We think investors' expectations of agentic-driven identity security and governance sales do not bake in all the upside that we expect the firm to see.

Bears say: Despite a massive tailwind, Okta could botch its top-line growth prospects through subpar execution, as we saw in the Auth0 integration. As a result, our top-line growth estimates for Okta may be too bullish.

Our fair value estimate for Okta is $200 per share, implying a 2027 enterprise value/sales multiple of 11 times.

We forecast Okta’s revenue growing at a 12% compound annual growth rate over the next five years with secular tailwinds behind its back. We view this growth as a result of two factors. First, the broader IAM space continues to grow at a solid pace, with identity security spending benefiting from the proliferation of AI agents, expanding attack surfaces, and enterprise demand for zero-trust architectures. This growth allows Okta to naturally grow its top line as clients increase their spending on identity-based security platforms. Second, and perhaps more critical, is Okta’s ability to drive sales via upselling and landing new customers. The firm's strong net retention rate is an indicator of this ability. Going forward, we project continued upselling activity along with new user adoption to drive the firm’s top line forward.

Okta’s GAAP gross margins have hovered in the low-70s range for the last few years. However, as the company grows, we expect margin expansion on the gross margin front. We see this phenomenon across our coverage as SaaS companies can distribute their costs over an increasing revenue base, driving the cost of sales down as a fraction of sales. As a result, we are modeling GAAP gross margins to expand to the mid 80% range over our 10-year explicit forecast.

Okta has spent heavily on research and sales in the past. The acquisition of Auth0, a smaller company recording operating losses, pushed these expenditures even higher in 2022. However, as Okta scales, we expect these line items to decrease as a percentage of sales. After first hitting GAAP profitability in 2025, we model Okta remaining GAAP-profitable throughout out explicit forecast, with the firm's operating margins approaching 30% over the next five years.

On the adjusted operating margin front, Okta has made substantial progress, expanding its non-GAAP operating margin to approximately 26% in fiscal 2026, as the firm has maintained its emphasis on efficiency and profitable growth. We expect the firm to continue expanding its adjusted operating margin as it scales.

We believe Okta merits a no-moat rating as the company’s hefty spending on sales and marketing (as evidenced by operating losses in recent years) will likely prevent the company from generating excess returns on invested capital over the next 10 years. We think that Okta’s underlying business benefits from high customer switching costs associated with its products and a network effect associated with the firm's integration network. The company also boasts strong dollar-based retention metrics and impressive customer growth. However, as a nascent business that transformed a bit via the acquisition of Auth0, we still think it will take a few years before Okta can generate economic profits in order to warrant a narrow moat rating.

Clients can leverage Okta's identity-based security platform, or Okta Identity Cloud, in workforce identity and customer identity. Okta has specific modules within these two verticals that span security, IT efficiency, workforce management, and customer experience.

To accurately contextualize Okta's eminence in the identity and access management, or IAM, space, it is vital to highlight the dissipation of the traditional security perimeter. As workflows and workforces have moved from onsite to a hybrid environment, the traditional security model of a secure perimeter has become increasingly obsolete. Instead, the hybrid-cloud and hybrid-work environments have pushed identity-based security as a means of enabling access to workflows and applications. Whether it is applications an employee needs access to or APIs an engineer wishes to run, an identity-based security approach verifies the individual's identity, their level of access, and then either allows or prevents entry. With digital transformations, cloud migrations, and the adoption of zero-trust security architectures only projected to increase, we view these secular trends as major tailwinds propelling the IAM space forward.

Okta's main claim to fame has been its workforce identity and access management, or WIAM, offerings. Put simply, Okta's WIAM modules allow its clients' workforces to connect securely to their employers' resources. As aforementioned, over the last several years, we have seen more workflow instances moving to the cloud and an increasing number of employees working remotely (even if for only a day or two a week). The covid-19 pandemic accelerated both of these trends, with digital transformations, cloud migrations, and hybrid work environments all gaining prominence since the beginning of the pandemic. The obvious issue arising from increased cloud adoption and remote work is a marked increase in the number of attack vectors nefarious players can utilize while targeting companies. Okta's WIAM offerings seek to reduce these attack vectors by providing a layer between individuals (employees in this case) and the company's resources. These resources, which can be either cloud-based or onsite, can virtually take any form, including applications, APIs, storage, et cetera. Besides providing a security layer, Okta's WIAM offerings also include modules that increase IT efficiency by automating account creation, resource access, and lifecycle management.

When considering Okta's WIAM offerings, we think that high customer switching costs are likely. Across our coverage, we see that enterprise security spend is sticky. We believe security-related IT decisions are driven by security analysts and engineers, not accountants. Put another way, we do not believe companies nickel and dime their way to picking security vendors, especially in the IAM space. Customers that adopt security solutions do so to take uncertainty off the table—switching vendors often brings uncertainty back into play. When considering WIAM, there is a risk in changing vendors with the possibility of unauthorized access being granted or authorized access being revoked. This risk is a genuine concern for firms using Okta to manage access to mission-critical and sensitive resources. While competitors may offer a parallel migration that allows these concerns to be somewhat allayed, we do not see companies switching away from Okta due to the risk of exposing critical data to nefarious actors.

When looking at Okta's WIAM offerings in specific, it is hard to ignore the firm's Okta Integration Network, or OIN. With over 7,000 integrations, ranging from hyperscalers to software application providers, OIN allows Okta's clients to securely access resources critical to their workflows in a secure, seamless manner. We believe this extensive network further aids Okta's switching costs, as its clients could lose critical vendor integrations if they switch away from Okta.

We also think that OIN can help lay the groundwork for a network effects moat source around Okta’s business in the future. As more vendors integrate into OIN, these integrations improve Okta’s value proposition to its customers. This improvement, in turn, leads to Okta being able to sell its Identity Cloud to more users (that are more eager to onboard an IAM vendor with integrations that provide seamless access to resources needed by its workforce). As Okta’s customer count continues to grow, more vendors may be integrated with Okta, allowing their applications to be more easily deployed by end users. Both the vendors’ willingness to integrate more resources and the clients’ preference for an IAM vendor with more integrations creates a network effect.

With the acquisition of Auth0, Okta staked a more significant claim in the burgeoning customer identity and access management, or CIAM, space. While Okta had CIAM offerings before it acquired Auth0, the acquiree's organization was far more ingrained in CIAM than Okta's. CIAM, in its essence, is a double-pronged space that not only focuses on providing customers secure access to a company's resources but also allows companies to have more visibility into their customers (a method of increasing sales efficiency). While CIAM is an up-and-coming market, we believe the potential for this space is massive. As we look at the future of business-to-consumer, or B2C, interactions, we expect an increasing number of these interactions to be digital. From a business perspective, it is increasingly important to enable secure onboarding and verification of customers. Okta's CIAM offering also allows businesses to maintain a universal directory of all clients, an essential resource for sales teams in particular.

In a digitized world, customers expect their transactions with businesses to be secure and frictionless. We believe Okta's CIAM offerings allow for these expectations to be met. Much like WIAM, clients are unlikely to switch away from a CIAM vendor as switching away from an established vendor can carry a heavy price, including lost customer data.

We believe another critical aspect of Okta's competitive strength is its neutrality. We believe that in a hybrid multi-cloud environment, enterprises are increasingly averse to vendor lock-in. Big software companies such as Amazon, Microsoft, and Google have long utilized the strategy of entering tangential verticals as a means of calcifying customer switching costs.

In the IAM space, in particular, Microsoft is a strong competitor. While competing against Microsoft in any subspace is far from desirable, we believe Okta's vendor neutrality gives it a competitive edge. When an enterprise uses Microsoft's IAM offerings, we expect it to be more beholden to using Microsoft across its organization. Over time, as an enterprise uses more Microsoft offerings, we expect to see a monopsonic dynamic emerge. Leaders across organizations have already begun to take note and have increased their adoption of multi-cloud strategies. Okta's IAM offerings, on the other hand, are source-neutral—allowing the firm to capture customers seeking to avoid vendor lock-in.

As mentioned above, we believe that both WIAM and CIAM verticals are conducive to high customer switching costs. As Okta lands and expands customers, its entrenchment in the client's security infrastructure deepens, leading to high switching costs. Further, the longer a customer sticks with Okta, we believe there are upselling/cross-selling opportunities that Okta can benefit from. These additional module sales are reflected in Okta's strong net retention rate.

Overall, we think the firm is still in early innings in terms of customer penetration and product adoption. We view this low penetration as providing Okta with a long runway for growth. We view both WIAM and CIAM spaces as largely greenfield, with many companies implementing in-house solutions that are expensive and unscalable over the long run. As a result, we believe Okta can land larger clients without having to displace well-entrenched IAM vendors.

That said, Okta has hefty sales and marketing expenses to capture these customers and is generating substantial operating losses in the meantime. These losses will prevent Okta from generating excess returns on capital in the near term and preclude us from assigning an economic moat rating to the firm.

Okta has strong secular tailwinds behind its back as the IAM market is expected to grow rapidly.

With products targeting both customers and workforces, Okta has more than one landing point in a client’s ecosystem and subsequently expanding the client’s spending.

Okta has a big opportunity as it moves upmarket and targets larger, stickier clients. Additionally, the firm also has a big opportunity in the international markets.

There are behemoths such as Microsoft, Oracle, and IBM that have products in the IAM space that provide competition to Okta.

After facing repeated security-related and execution issues, customer confidence in Okta's solutions may remain affected.

Okta’s acquisition of Auth0 could prove to be value-destructive with sales integration challenges, leading to Okta not being able to extract synergies from its acquisition.