Looking for the Next Shopify? This High-Flying Cloud Stock Could Be It.

A digital image of dozens of clouds with locks on them

Shopify (NYSE: SHOP) stock has captivated the market since its 2015 IPO. The maker of cloud-based e-commerce software has jumped nearly 500% in less than three years, and many investors think the ride is just beginning. Shopify has a number of huge tailwinds in its favor, including cloud-computing, which is taking over traditional enterprise software, and e-commerce, which is grabbing market share from brick-and-mortar retail but still makes up less than 10% of total retail sales in the United States.

With the help of those trends, revenue at the Canadian software specialist continues to soar -- it was up 71% in its most recent quarter. It's not a surprise then that the market is searching for the next Shopify.

There's one recent IPO with a similar model to Shopify's and many of the same strengths, and it's also putting up impressive growth numbers. It is cloud-based security provider Okta (NASDAQ: OKTA) .

What is Okta?

Okta (pronounced Ahk-ta), defines itself as the leading independent provider of identity security for enterprise. In plain English, the company makes products that enable users to securely connect to the platforms, websites, and devices they need to conduct their business. With its central product, the Okta Identity Cloud, the company handles things like password protection and connectivity so executives, employees, and customers can stay seamlessly connected and integrated, saving organizations time and money.

Okta pioneered identity in the cloud, and was named a leader by both Gartner and Forrester Research for Access Management and IDaaS (Identity as a Service). Among its customers are JetBlue , 20th Century Fox, and Linkedin.

Since its IPO last April, the stock has gained 81%, with revenue jumping 62% last year as the company recruited new customers and expanded it relationship with existing ones. Okta is still operating at a loss, though, and it's likely to stay that way for the foreseeable future as the company invests in growth.

Examining the similarities

Shopify and Okta compete in different business lines, but the two young cloud-based companies have a surprising numbers of things in common.

  • Industry-leading positions in enterprise cloud software, allowing them to benefit from huge, long-term, macro-level trends.
  • Subscription-based business models, which are easily scalable and will become more profitable as they get bigger.
  • High revenue growth, despite bottom-line losses.
  • A significant portion of expenses devoted to sales and marketing, evidence that the companies see significant growth ahead and are sacrificing profits now to gain market share and build scale to give themselves a competitive advantage.
  • A current competitive advantage through switching costs. Once customers start using each platform and integrating them with their businesses, it costs significant resources to move away from it, making current subscribers more likely to stick with the service.
  • Growth opportunities exist in adding new customers and expanding relationships with current customers, i.e. signing them up for higher-value products.

Of these shared characteristics, the most important seems to be their leading positions in their respective corners of the cloud market. Estimates vary for expected growth in cloud services, but are often above 20% annual sales growth, which means that both should see revenue ramp up steadily over the coming years as more companies migrate to the cloud.

Both Okta and Shopify's strengths, with their revenue growth and future opportunities, remind of some of the characteristics identified as generating market-crushing returns for Amazon , Tesla , and Netflix .

Will lightning strike twice?

Analogies and comparisons are popular with investors as they offer an easy way to understand and explain businesses, but they can also be a crutch. There was a time when every fast-casual IPO was called the "next Chipotle ," and that ended badly for pretty much every one of them.

Okta and Shopify have their differences, namely that they compete in separate spaces, but many of the factors that have driven Shopify's success, including its huge growth and market opportunity, apply to Okta as well. Investors have also shown their willingness to overlook weaknesses like pricey valuations and a lack of profits with Shopify, so they should be able to do the same with Okta.

Both companies expect to see revenue growth slowing this year, but the long-term opportunities clearly outweigh investor concerns about slowing growth for the two cloud-based operators.

Okta stock is already up 66% this year as investor enthusiasm for the security specialist builds. After a strong earnings report, there's plenty of reason to believe this upstart will continue following in Shopify's footsteps.

Find out why Oktais one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)

Tom and David just revealed their ten top stock picks for investors to buy right now. Okta is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of March 5, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Jeremy Bowman owns shares of Chipotle Mexican Grill and Netflix. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, Netflix, Shopify, and Tesla. The Motley Fool recommends Gartner, JetBlue Airways, and Okta. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.