Okta: A Unique Tech IPO In A Volatile Climate

| About: Okta, Inc. (OKTA)

Summary

While still in the red, its revenue growth far outstrips its loss growth.

It is the leader in a fast-emerging component of cloud software, but far from the only player.

The kind of platform it is favors a smaller, independent firm, rather than a tech giant.

When you are a David in a sea of Goliaths, it helps to be nimble and independent. This independence is founder Todd McKinnon's value proposition for his cloud-based identity management software company, Okta (NASDAQ:OKTA).

Its public listing on Friday morning netted McKinnon and his co-founder, Freddy Kerrest, tidy nine-figure payouts. Shares of the company closed at around $23.50, 40% higher than expected, giving the Okta a market cap of $2.1 billion.

Okta is a fast-growing "identity cloud" or a platform helping users make sense of the myriad of apps and technologies they need for their business to function. It does this by integrating and securing them into one entity, like popular reviews, secure and simple. Its platform has integrated 5,000 apps and continues to grow.

In an interview with CNBC, McKinnon said, "the platform securely connects all the people that a company interacts with - customers, partners, suppliers, employees - to the technology they need to work, be it email or a customer portal."

And as with most tech start-ups, Okta is currently operating at a loss. For the year ending on January 31, 2017, losses were $83.5 million on a revenue of $160.3 million. Yet in 2016, the company realized a $76.3 million loss on $85.9 million in revenue and, in 2015, a $59.1 million loss on $41 million in revenue. The clear pattern here is that revenue growth is not only outstripping loss growth, but the ratio between them is increasing.

Identity management cloud software is significant in the future of cloud software. As the variety of apps, platforms and technologies grows exponentially, the focus is shifting from the technologies themselves to the way they can be best managed in the interest of those who need them.

This is where Okta and its emphasis on 'identity' come in. The idea of having a single, core identity which can unite profiles on countless platforms into one, coherent user portal like popular reviews. McKinnon and Kerrest were praised in a blog post by VC backer Sequoia Capital on understanding the importance of identity in cloud software "years before the world caught on."

However, some see flaws in the company's long-term viability. In a Forbes feature, the CEO of rival company Sailpoint (private) pointed out that Okta lacks the security and back-office functions offered by giants Oracle (NYSE:ORCL) and IBM (NYSE:IBM) - as well as his own company - calling it a "badge reader" rather than someone who can actually vet the badge carrier.

Such words are to be expected from a rival company, and Okta is not making itself out to be leaders in "identity governance," which Sailpoint specializes in. And the irony is that an IPO for Sailpoint might depend on the success of Okta, which would increase the appetite among investors for another public listing of its kind.

Gartner Group, a tech research and advisory firm, placed Sailpoint first in a report on leaders in "Identity Governance and Administration," citing its "vision execution" along with IBM and Oracle. Sailpoint also claims to be profitable. But if Okta keeps up its revenue and loss trend, this should change soon enough.

Then there is the question of how much it can scale up. With giants like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) probably offering something similar for free in the coming years, McKinnon was grilled by a CNBC panel on how his company would be able to stave off the competition. In an assured voice, he pointed out that this technology is about linking platforms together.

It's really about connecting these clouds together: Amazon to Microsoft to Salesforce to Workday. Out value proposition is that we sit in the middle of it all, we know about all the applications, and we can securely connect our customers and users to any cloud," he explained. "Whatever is best for them and their business, and not what might be best for any platform."

Okta currently trades at $23.67 (at the time of writing), and if you are thinking of buying you need to consider two things.

First, how long you are willing to wait for the company to become profitable. Current trends indicate profitability within the next few years, making this a long-term investment. Second, the IPOs of other similar companies like Sailpoint will shed more light on Okta as a stock option, seeing as it is the first of its kind.

Time will tell whether McKinnon and Kerrest can create a highly profitable company by maintaining their current revenue growth trends, or whether competition from more specialized companies like Sailpoint or tech giants like IBM will come to fruition. For now, Okta leads the way.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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