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Entrepreneur
Kurra Bewarse
Username: Entrepreneur

Post Number: 3348
Registered: 05-2011
Posted From: 65.35.45.47

Rating: N/A
Votes: 0

Posted on Thursday, March 04, 2021 - 7:00 pm:   

Okta not looking very OK today on lackluster guidance and pricey acquisition (OKTA)
Updated: 04-Mar-21 11:22 ET
Okta (OKTA -3%) is not looking very OK today. The stock is lower although the company reported a sizable earnings beat for Q4 (Jan). Analysts had expected a small loss, but Okta surprised with a $0.06 profit and strong revenue upside. However, the company's guidance and its announcement of a major acquisition have provided Okta investors with more to scrutinize today.

As a cybersecurity company focusing on identity management, Okta has surely benefited from the shift to remote working/learning as thousands of companies have had to adapt quickly to new work procedures and environments, seeking solutions to allow employees to easily connect and collaborate with colleagues. Additionally, as web and app traffic surged, companies have needed to modernize and strengthen their security and identity postures.

So, why is the stock lower?

For both Q1 (Apr) and FY21, Okta is guiding to a much larger loss than had been expected. The main reason for the full year shortfall is that Okta plans to spend money to scale its business, including increased head count in sales, especially internationally, and across R&D to drive innovation. We think scaling for growth makes sense, but there will be a near-term impact on margins and EPS.
Investors should be aware that Okta tends to low ball guidance, so the larger losses are less likely to be realized, in our view. What concerns us more is that revenue guidance for both periods is basically in-line, whereas Okta usually provides upside guidance. Perhaps it is just being conservative.
Okta furthermore announced that it will acquire Auth0, which also provides identity security. We like the pairing because Auth0 brings a more developer-centric approach to the market. Auth0 should get to $200 mln in ARR in FY22, representing growth of over 50%. Also, like Okta, Auth0 has a highly recurring revenue stream that is very loyal. Auth0 will add thousands of customers, many of them are developers, and hundreds of millions of users. The deal also increases Okta's international footprint.
We like the Auth0 deal as a good fit, but the $6.5 bln price tag is hefty at 32x ARR. Perhaps even more troubling is that it's an all-stock transaction. It makes sense for Okta to use its lofty stock price as currency, but using stock also has a dilutive effect. Plus, it's a signal that Okta management feels its stock price is pretty fully valued.
In sum, this was another great quarter for Okta and another example that the pandemic has been great for its business given the upsurge in people logging on remotely. However, the guidance makes it clear that Okta's near-term priority is not profits, but rather on scaling its business, so investors will need to be patient. Finally, the Auth0 deal makes sense strategically, but the hefty price tag and all-stock component are weighing on investors' minds today.

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