In light of AI's increasing prominence, Okta offers essential security services at an affordable price
Attacking computer systems has become much simpler for criminals due to the development of artificial intelligence (AI). For many businesses and consumers worldwide, protecting against these attacks is now their top priority. When you search for "cyberattack" online, you can see how big of an issue it is. At the end of August, the US artificial intelligence company Anthropic claimed that hackers had "weaponized" its technology "to commit large-scale theft and extortion of personal data." 17 organizations, including government agencies, were hacked using its tools, it claimed. It's only one headline, too.
Therefore, it is not surprising that cybercriminals and security experts have started an arms race. One of the leading companies is Okta (Nasdaq: OKTA). The US company provides a platform that protects users by confirming their identities. To safeguard identities and allow users to access apps from any device, it offers multi-factor authentication (MFA), single sign-on (SSO), and secure identity verification.
How a rally was missed by Okta.
Users no longer need to remember multiple passwords thanks to SSO, which enables them to sign on to multiple platforms using a single set of credentials. That's crucial as AI's password-cracking capabilities advance. Using unique, randomly generated passphrases of 1216 characters that combine capital and lowercase letters, numbers, and symbols is currently the best practice for passwords. Many users choose straightforward, memorable passwords and use them on several different platforms.
Oktas MFA adds a crucial layer of security by offering additional authentication techniques to authorize a sign-on. It is an improvement over the two-factor authentication method that has been used by all banks for the past five years. Two-factor authentication uses two different ways to identify a user, like a password and a code that is texted. Three or more layers, such as biometrics and an app that generates random numbers, can be a part of MFA.
The company's authentication software is in high demand. With a compound annual growth rate of 36.1 percent, Okta is projecting sales of slightly less than £2.09 billion for the 2026 fiscal year, up from £234 million in 2021. However, the shares have lost 55% of their value over the last five years, and Okta has lost out on a large portion of the recent rally driven by AI.
Two factors contribute to the company's poor performance. First, although revenue has increased rapidly over the last five years, it has slowed down over the last three, reaching a compound annual growth rate of roughly 15%. The second problem was that, following the disclosure that hackers had obtained user data from its customer support system in a network breach, the company's shares dropped by over 70% in 2022. A comprehensive review of this breach and the implementation of measures to prevent its recurrence have taken Okta several years.
Okta's comeback to expansion.
Okta seems to be overcoming the problems that have beset the company for the previous three years. Wall Street and management expectations were blown away by its second-quarter earnings release. Contracts with the US government contributed significantly to the expansion. According to the company, the general trend for government contracts was favorable, even with Trump's plans to reduce spending. The company's net retention rate, a measure used to demonstrate growth with current clients, was 106 percent for the quarter as a whole, staying constant from three months prior. According to UBS, this rate should pick up speed in the upcoming quarters as Okta resumes organic growth using its upgraded tools and the Covid-cohort of customers' headwinds subside.
The development of AI agents, or autonomous software systems driven by generative AI that are capable of reasoning, planning, and task execution, presents management with a significant opportunity to make money. Based on a 45 percent compound annual growth rate, the Boston Consulting Group projects that this market will reach £52 billion by 2030 from £57 billion in 2024. Last month, Okta paid £100 million to acquire Axiom, a start-up that specializes in non-human identity security. Okta has established a niche in agent-to-app and app-to-app access.
Despite its potential, the company and its future are still viewed with suspicion. There might be an opportunity here. UBS estimates that the shares are currently trading at a forward price-to-earnings ratio (p/e) of 27.1, which will drop to just 16.6 by 2030. If Okta's projected year-end net cash balance of £24.4 billion (£13 per share) is subtracted, the ratio drops to 23. Even better is the company's cash generation. It is a bit of an anomaly among tech stocks, trading at a free cash-flow yield of 4:08 percent. With a free cash flow margin of 28.4 percent, UBS projects that the company will generate £819 million in free cash flow for fiscal 2026.
In comparison to Palo Alto's recent acquisition of CyberArk, Okta's valuation also seems low. The two businesses are both experts at protecting network access points, but CyberArk concentrates on the most important and dangerous accounts. Nevertheless, Palo Alto paid £25 billion to acquire the group's technology, even though as of the second quarter, the company was only making £1.33 billion in recurring revenue annually. Because there are fewer opportunities in the market, analysts think the deal could be a net positive for Oktas shares. Additionally, according to UBS, the deal might boost Oktas sales as consumers seek out independent options free from the dominance of one of the biggest names in the tech industry.
Okta share price.
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