Will a surge in subscriptions boost Okta’s share price to new heights?

Okta’s [OKTA] share price has grown steadily since its slump in March. The stock’s upward trajectory peaked in October at an intraday high of $251.18 and has fallen 2.44% to close at $245.04 on 30 November. As the company prepares its third-quarter results, due 2 December, should investors expect another surge in Okta’s share price?

On the stock’s worst day of trading so far this year, Okta’s share price sank to $96.08 on 16 March, marking a fall of 16.7% year-to-date. It didn’t take long to rebound, though, and in just four days Okta’s share price was trading up again in the year-to-date.

On 20 March, Okta’s share price closed at $115.45 and the stock has been above this level since.

More recently, Okta’s share price closed at an all-time high of $246.95 on 13 October, which marked a climb of 114% year-to-date. Although the stock took a tumble over the following weeks, falling 17.4% to close at $203.86 on 2 November, this was still up 76.7% year-to-date.

Only scratching the surface

When Okta released its second-quarter earnings for the fiscal year 2021 on 27 August, it announced adjusted earnings of $0.07 per share, which marked a 40% rise from the year-ago period and beat the consensus estimate of $0.02 per share offered by Zacks Equity Research.

Meanwhile, revenues totalled $200.4m for the quarter ended 31 July, marking an impressive 43% growth year-on-year and a positive surprise of 7.7% according to Zacks. The growth was largely attributed to higher subscription revenues, which made up $190.7m of total revenue, marking year-over-year growth of 44%.

“[Okta’s] remaining performance obligation — which consists of future revenue that is under contract but has not yet been recognised — climbed even higher, growing 56%. Okta also generated adjusted net income, up from a loss in the prior-year quarter,” Danny Vena wrote in The Motley Fool.

“Okta has only begun to scratch the surface of its immense opportunity. Revenue of $586m in 2019 pales in comparison to its total addressable market, which management estimates at about $55bn,” Vena added.

“Okta has only begun to scratch the surface of its immense opportunity. Revenue of $586m in 2019 pales in comparison to its total addressable market, which management estimates at about $55bn” - Danny Vena

Unlike many companies that have withheld their guidance as a result of the market uncertainty brought about by COVID-19, Okta shared its future outlook as part of the earnings report. The company stated that it expects a “non-GAAP net loss per share of $0.02 to $0.01” and for revenues to grow to $202m to $203m, which would mark a growth of 32-33% year-over-year.

According to Zacks, this is pretty much in line with analysts’ expectations, which call for a loss of $0.02 per share and revenues of $202.63m.

For the full year, the research publication is projecting Okta to make a loss of $0.02 per share and for revenues to reach $802.19m. The predictions suggest respective year-over-year growths of 93.5% and 36.8%.

Beyond the firewall

“A key point to the Okta investment thesis is that virtually all of the company's revenue (about 95%) is derived from subscriptions,” according to Sean Williams, writing inThe Motley Fool. “Subscriptions are a much higher-margin way to generate cybersecurity revenue than physical firewall products. It also doesn't hurt that subscriptions have a tendency to reduce client churn and eliminate the revenue lumpiness associated with physical security products.”

“As Okta's customer count grows and its existing clients expand the number of security solutions needed, operating margins should soar.”

“Subscriptions are a much higher-margin way to generate cybersecurity revenue than physical firewall products. It also doesn't hurt that subscriptions have a tendency to reduce client churn and eliminate the revenue lumpiness associated with physical security products” - Sean Williams

Michael Turits, an analyst at KeyBanc, initiated coverage on Okta’s share price on 23 November with an Overweight rating and $282 price target, according to The Fly.

In a research note to investors, he said that Okta was, in his view, a successful independent identity and access management vendor that addressed the identity needs of the cloud-based, work from anywhere economy. He expects identity, not the firewall, to become " the new perimeter” when applications move to the cloud and users move beyond the firewall.

Zacks has given Okta a Hold rating, while the consensus among 22 analysts polled by CNN Money is to buy. This comes from a majority of 13, with eight analysts giving Okta’s share price a Hold rating and one rating Okta Underperform.

Among 17 analysts offering 12-month forecasts for Okta’s share price, CNN Money reported a median target of $240, with a high estimate of $282 and a low of $218. The median estimate represents a 2% decrease on Okta’s share price as of close on 30 November.

Okta share price vitals, Yahoo Finance, 1 December 2020