Why Investors Should Be Watching Okta

When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market. They just revealed what they believe are the ten best stocks for investors to buy right now... and OKTA wasn't one of them! That's right -- they think these 10 stocks are even better buys. The stock I picked is in the digital transformation space, and it's OKTA. The ticker symbol is OKTA, one of those rare cases where it's the full company name. This is basically a software company, a cloud services company that specializes in digital identity management -- so, basically, helping businesses move more of their processes and people online, which you can imagine is definitely a fundamental part of this space. I highlight OKTA for two big reasons right now. The first is they report earnings tomorrow after the closing bell, that's Dec. 1. So it's definitely worth watching the stock. It's a surprise to me that the stock is down about 8% so far this year, where the rest of the market is up around 20%. It's still up a lot in the last three years, but it's not had a really good 2021. So it's definitely one worth watching, if you're excited about this space and turned off by surging share prices in some of those other stocks. But I wanted to highlight a slide or two from their last earnings report. I always struggle to do this right. Let's see if I can share my screen... and hopefully, that one's coming across. This is just a big picture slide of OKTA... "at a glance," they call it, and you can see on the right here, this is their annual sales over the last four years. And they are projected to rake in $1.2 billion in annual sales this fiscal year -- fiscal 2022. And just two years ago, that was half of that, $600 million, and the year before that, it was $400 million. So clearly, a lot of growth. Some of that's coming from a major acquisition they made recently. But the other number to highlight here is this 124%. We talked last week about the customer engagement metric -- that's hard to capture, but we always like to see, and I always like to see, in my stocks, at least. That's what that number tells me. This one dollar based net retention rate, which is a long way of saying "the rate at which people renew their annual contracts." This 124% equates to basically 24% higher renewal of the value of your contract to the one you had the year before. That just speaks to OKTA's ability to market more of its products to customers, and it's got a lot of customer loyalty because of that net number. You love to see that number being significantly above 100%, which it is. Then the other slide I'd like to highlight here -- let me see if I can find it, there we go -- speaks to its attractive, addressable market. They recently bought this company called Auth0, and it was about a $7 billion purchase -- massive purchase. It unlocked more space that they're hoping to grow in things like security, end-to-end fraud protection, and just a lot bigger than this Identity Cloud, which is their traditional space. That's got investors pretty excited. But the thing is, Wall Street's kind of nervous about the acquisition, I think. If I was looking for reasons to why the stock would be underperforming right now, it's a big acquisition, and it's probably going to bring profitability down at least for the next year or so because Auth0 is more growth-focused, so margins are going to drop earnings are going to look maybe a little weaker over the next year or two.