Like most software stocks did in 2022, Oct (OCT -1.14%) disappointed investors.
With the year almost over, shares of Okta, the cloud identity company that helps employees and customers log in and stay connected to the apps they need, are trading down 70% year to date, spoiling what has been a great run for the stock since its IPO in 2017.
Falling valuations in the software sector and macro headwinds weighed on the stock. Shares also took a hit in September on the company’s own admission of problems integrating the sales force from Auth0, the customer identity company it acquired last May. As a result of those issues, it pulled its long-term guidance, which had called for the company to reach $4 billion in revenue by fiscal 2026 (which ended in January 2026).
All these issues combined to make a forgettable year for Okta. Will 2023 bring better news for investors?
Macro woes but a reason to be hopeful
Going into the new year, investors seem increasingly pessimistic about the stock market and the software sector. Stocks kept declining through December after the Federal Reserve forecasted more rate hikes next year, and Okta and its peers are already reporting slowing customer demand and longer sales cycles as businesses prepare for a recession.
The company’s guidance for the fourth quarter seems to reflect that. Management called for revenue growth of 27% to 28%, down from 37% growth in the third quarter, even though Okta’s guidance has historically been conservative. In preliminary guidance for next year, it forecast revenue growth of just 16% to 17% due to macro challenges, a transition in its go-to-market strategy as its chief revenue officer steps down, and its integration challenges with Auth0.
However, there is reason to be hopeful for Okta’s performance. First, the company took significant steps toward improving profitability as it reported break-even adjusted earnings per share (EPS) compared to expectations of a loss per share of $0.24. It called for adjusted EPS of $0.09 to $0.10 in the fourth quarter, much better than estimates. It also expects to continue growing profits and cash flow.
The company also took steps to expand its product lineup and addressable market, going into adjacent markets such as identity governance administration (IGA) and privileged access management (PAM). It’s already rolled out IGA and expects to introduce PAM by the end of the next year. With those products, the company will tap into an $80 billion addressable market. There are also signs that some companies are waiting for the PAM launch to sign up for Okta’s cloud suite, meaning growth could accelerate once PAM rolls out.
Finally, the company is also seeing strong growth in the public sector. Revenue is up 65% through the first three quarters compared to the same period a year ago. The rise is attributed to Okta recently gaining IL-4 certification, which allows it to sell to the Department of Defense. It also expects to soon get FedRAMP High authorization, which will open up more doors in the public sector.
Is Okta a buy?
Despite the expected headwinds in 2023, Okta still looks well-positioned to continue to grow as the leading independent cloud identity platform. It’s penetrating a large, evolving addressable market, and the company should have a long growth opportunity in front of it, which could accelerate once it releases PAM. Okta has also demonstrated it has more control of its profits than investors thought, and it’s expected to continue improving its bottom line.
Currently, Okta stock trades at a price-to-sales ratio of just 6, making the stock look cheap relative to its long-term growth potential. While Okta stock will be subject to the macro challenges next year that the rest of the market is facing, the current price looks like a good entry point for long-term investors who can tolerate volatility over the next year.