Volatile stock returns this year suggest that investors haven't decided just what to make of Okta's (OKTA -1.66%) business in 2023. On the one hand, the software specialist is building a leading market share position in a tech niche that could see strong growth for many years. It is pairing solid sales gains with improving financial metrics like cash flow, too.
Offsetting these positive trends is the fact that Okta continues to generate significant net losses. And competition remains fierce in the cybersecurity and digital transformation niches, including from much larger rivals.
With that bigger picture in mind, let's look at the software-as-a-service stock to see if it's a good buy right now.
Mixed results
Okta's last earnings update contained both good and bad news for shareholders involving its growth. On the bright side, second-quarter sales gains were surprisingly strong, with revenue expanding 23% through late July.
But it has become harder to win new customers lately as IT spending growth slows. The company gained 350 new clients in the second quarter, representing growth of about 12%. The expansion rate was 14%, by contrast, in the previous period.
"New customer growth is an area that we believe is being impacted by the macro environment," CEO Todd McKinnon told investors in late August.
Two positive trends are helping offset that weakness. First, Okta is landing a higher proportion of large enterprise deals. It has a record number of contracts that are over $5 million in annual revenue today.
Second, the company is finding success in expanding its existing relationships through upselling and cross-selling. "Both new and existing customers are getting tremendous value from the Okta platform," McKinnon said.
Financial hits and misses
The news has been similarly mixed on Okta's financial trends. Unfortunately, the red ink has been significant lately, with the operating loss over the last six months landing at $322 million, compared to $448 million a year earlier. Net losses in the first half of 2023 were a painful 21% of sales.
OKTA free cash flow data by YCharts.
Yet the company's cash-flow trend, a key metric for software-as-a-service companies, is pointing in the right direction. Operating cash flow flipped into positive territory this past quarter, reaching 10% of sales, compared to a 5% outflow a year ago.
Gains here, combined with shrinking net losses, have investors feeling more optimistic that the business will soon show signs of sustainably positive earnings.
Looking ahead
Most investors will want to simply watch this stock until they see more concrete evidence that the business can deliver profitable growth for shareholders. Okta is still posting losses today, after all, and a weakening selling environment might amplify these challenges through late 2023.
The good news is that Okta's stock valuation arguably incorporates most of these bearish prospects. Investors today are paying about 7 times annual sales for the business, down from pandemic highs of closer to 45 times. More-successful cybersecurity specialists like Palo Alto Networks are valued at closer to 12 times annual sales.
Okta's business will need to achieve some major victories for the stock to approach a valuation like that. Palo Alto is generating steady net profits, and its free cash flow is running close to 40% of sales. Investors should consider following Okta as it progresses toward these financial improvements over the coming quarters.
