Work-from-home stocks have been on fire in 2020 as the novel coronavirus pandemic closed down offices across the globe. Amid this surge in demand for remote work solutions, identity-focused cloud security company Okta (NASDAQ:OKTA) stock has shined bright.OKTA)" width="300" height="169">
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OKTA stock is up 75% this year on the back of supercharged demand for its flexible cloud security solutions, which are made for today’s remote work environment.
Some pundits point to valuation headwinds as a reason why OKTA stock can’t go much higher.
After all, shares do trade at 40-times trailing sales.
But those pundits are wrong.
Okta stock can keep brushing off valuation headwinds and continue to power higher. Plus, if shares do drop on valuation headwinds over the next few months, buy that dip below $180.
The Okta Story Is Compelling
Okta’s long-term growth fundamentals are robust, and promise that this company will sustain huge customer, revenue and profit growth for the next five to 10 years.
The story is pretty straightforward.
Okta has developed a unique cloud security solution called the Identity Cloud. This solution is built on the novel idea that all you need to do to secure a workplace, its data and its workflows, is secure its employees. So, as opposed to building a castle of security around a company’s data and workflows (which is the traditional security standard), Okta uses its Identity Cloud solution to outfit each employee with their own body armor.
Why do this? Because it enables employees to leave the “castle” and still be safe. They can securely access important company workflows and information from anywhere, at any time.
Of course, in today’s Covid-19 stricken world, this security solution is mission-critical. Employees aren’t at the office. They are at their homes. Enterprises consequently need to adopt a cloud security solution which accounts for today’s remote work reality wherein no one is in the “castle”.
But, bigger picture, once Covid-19 passes, Okta’s demand tailwinds will remain robust. That’s because employee mobility and workflow flexibility are of increasing importance to the enterprise, and for many companies, work from home is a permanent change that will persist long after Covid-19 passes.
To that end, Okta will see demand for its breakthrough Identity Cloud platform soar both now, and for the foreseeable future.
This is still a fairly small company. Revenues project to be about $780 million this year. Global IT spending measures in the trillions of dollars. There’s ample runway for further growth. Plus, gross margins are huge, up near 80%, implying significant room for economies of scale to drive positive operating leverage, and turn big revenue growth into even bigger profit growth.
All in all, Okta very clearly projects as long-term winner.
The Stock is Fairly Valued
Despite its sales multiple of 40, OKTA sock is not overvalued today. Rather, shares are fairly valued.
My model on Okta makes some very basic assumptions, including:
- The global Identity and Access Management (IAM) market, to which Okta belongs, grows at a 15%+ clip over the next several years, powered by increasing enterprise demand for security solutions which optimize for employee mobility and workflow flexibility.
- Okta leverages its market-leading Identity Cloud platform to grow reach, and expand its share of the global IAM market from 4% in 2018, to more than 15% by 2030, powering consistent 15%+ annual revenue growth along the way.
- Economies of scale drive Okta’s operating margin from -8% last year, to 40% by 2030 (which is essentially fiscal 2031 for Okta).
- Okta’s earnings per share roar towards $12 by 2030.
Based on an application software sector-average forward earnings multiple of 35, that implies a 2029 price target for OKTA stock of $420. Using a 10% discount rate (my usual discount rate), that equates to a 2020 price target of OKTA stock of $180. However, using a lower 7% discount to account for today’s lower fixed income rates (with the 7% derived from a 6% equity risk premium plus a 1% 20-year Treasury yield), that equates to a 2020 price target of $230.
Thus, I see OKTA stock as fairly valued anywhere between $180 and $230.
There is a chance that valuation headwinds coupled with broader market volatility surrounding Covid-19 drag Okta stock lower in the near term. If so, my numbers suggest that dips below $180 are great buying opportunities.
By the same token, rallies above $230 should be seen as an opportunity do some trimming.
Bottom Line on OKTA Stock
OKTA stock is a long-term winner. This is a name you want to own for the long haul.
The only question, then, is at what price do you want to own OKTA stock.
Buy dips below $180. Fade rallies above $230. Considering the stock is in between that range right now, I think the best thing to do here is exercise patience, and wait for either a big move higher, or a big move lower.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long OKTA.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.