Thread by @convequity

1/ $OKTA thesis. Not advice.

a) An opportunity to exploit coz of investor short-sightedness

b) Core biz is strengthening & could become the most valuable aspect of Zero Trust

c) The cloud-native approach will eventually smother out incumbents in newly entered markets

cont.

2/

d) Relative attractiveness compared to $NET and $ZS

e) Current price looks to be the lower bound of intrinsic range

f) High SBC but we calculate a 5% dilution charge going forward – not excessive if you believe in the long-term thesis

3/ Yesterday $OKTA dropped 8% following its Q4 ER.

Expanding operating losses continue to put off investors.

However, the increase in losses is entirely attributable to the temporary Auth0 integration expenses.

4/ We view this as quite short-sighted given the merged entity has a large and expanding TAM to dominate.

Total growth in past 3 qtrs – 57% in Q2, 61% in Q3, and 63% in Q4 – highlights the promise of the synergistic cross/up selling is materializing already.

5/ The Auth0 M&A put OKTA in the CIAM market.

What does Auth0 do?

6/

Pandemic > greater online CX expectations > devs now need to include more seamless signup/login experiences into apps > but doing identity stuff is REALLY HARD > Auth0 provides SDKs for devs to slot in their apps for various authentication/authorization needs.

7/ This is a huge TAM, prob much bigger than what OKTA has officially disclosed to investors.

There are huge cross/up sell opportunities – already manifesting in the accelerating growth.

8/ In essence, the combined entity is sandwiching the entire identity market with BoB SaaS & PaaS solutions and employing a dual top-down + bottom-up sales strategy.

9/ Though, the real synergy will come when OKTA infuses its risk policy engine w/ Auth0’s platform.

10/ Thanks to its 1st mover advantage in doing the cloud-native IAM, OKTA has rapidly accumulated 15k customers each with 100s/1000s of employees accessing apps. As a result, it has arguably the most sophisticated access management engine available.

11/ Bringing that type of security to the B2C world is very much needed. And we feel all this has not been typically considered by investors – instead they’re focusing on the temporary losses.

12/ OKTA’s development of its risk policy engine has evolved it way beyond a typical IAM vendor & this puts it in a prime position to capitalize on Zero Trust adoption.

13/ ZT is the best way to stop cybercrime in dist. environments, but need to be balanced w/ user experience. OKTA’s risk engine can grant risk-based access dependent on perceived threat level and continuously monitor.

14/ This could be the most valuable component of a ZT architecture – getting the right balance of security & productivity. And as OKTA is one of the most interoperable vendors, they can work with any set of ZT vendors.

15/ OKTA is rolling out solutions in IGA & PAM, to take on incumbents $SAIL & $CYBR. Although the incumbents have stickiness coz of legacy entanglement, over time OKTA’s cloud-native approach should prevail – sharing an est of 35% of accounts gives them a head start.

16/ We see relative attractiveness vs $NET & $ZS. Total growth is similar, OKTA’s organic growth (at c. 40%) is not a million miles away, esp. considering they have way higher revenue base, & as already alluded to, it’s deeper negative margins are result of large Auth0 acq.

17/ And bear in mind that all 3 are security players and disruptive innovators in their respective fields & each has comparable TAMs.

It seems the only plausible explanation for OKTA’s decline is the Auth0 merger & the near-term losses it has accrued.

18/ Based on forward EV/S & EV/GP, OKTA looks attractive vs NET/ZS (see analysis table). Also OKTA’s FCF mgn is positive which should dispel the criticism that it won’t reach acceptable profitability – clearly when R&D and S&M expenses normalize this will be a profitable business

19/ From a DCF perspective it looks like the current price is the lower bound of the intrinsic range. To access our valuation model, click the Google Sheets link docs.google.com/spreadsheets/d…

20/ A note on SBC.

Based on Q3 filing (10K not available), OKTA has a total of 44m shares available across outstanding & future options/RSUs & ESPP.

21/ If we use options’ weighted avg contract life of 5.5 years & current outstanding shares to calc. an est of annual dilution, we get a 5% dilution headwind.

44m shares / 5.5 yrs / 155m out. shares = 5.2%.

Not small charge but prob ok if you believe in the long-term thesis.

21/ To summarize:

Strengthening IAM moat into risk engine prime for ZT

CIAM is the real innovation space where OKTA is moving to B2C/B2B identity

IGA/PAM markets are prime to be taken with a cloud-native solution

Relative value vs NET and ZS

Investor short-termism = alpha