Even (or perhaps especially) in a market like this, tech companies are constantly on the lookout for ways to improve operational efficiency, which bodes well for this B2B SaaS stock. Identifying enduring companies that generate outsized portfolio gains comes from asking the essential questions:
- Who does the company sell to? Properly identifying the customer base allows for better examination of investment risk. A B2C (business to consumer) is operating a very different business model than B2B. Enduring B2C companies are often “winner take all” or cyclical – let’s dive in. Uber competes largely with Lyft for the U.S. ridesharing market and operates a B2C business model. As a result, to dominate the market, both are forced to spend aggressively to maintain market share. This tends to put a dent on margins.
Amazon – the king of B2C businesses – did not begin to generate outsized margins until the company began the ambitious undertaking of launching AWS – a B2B service. Around this time, the stock began to take off.
- How essential is the product or service to the end user? Put another way, is spending on the product or service least likely to be reduced during a recession? This idea reflects the power of B2B software. Software infrastructure companies are extremely resilient to any market environment because other businesses rely on the software to run their companies. B2B software becomes a critical component of the operations once adopted.
Today, businesses are more reliant than ever before on software to run their operations. Massive amounts of structured and unstructured data is being stored online in the “cloud” (Amazon Web Services, or Microsoft Azure). Businesses are using warehouses (Snowflake) and databases (MongoDB) to store, parse, and analyze data.
The advancement of AI solutions is being demonstrated at Google within their subsidiary – Deep Mind. But also, at places you may not expect like Tesla, which uses machine learning and deep learning to power their self-driving software.
These actions reinforce the need for more storage, more semiconductors, increased cyber security, and better authentication.
That is why today we are highlighting a SaaS stock than will outperform over the next decade.
Okta, Inc. (OKTA) has a resilient business model, as their authentication service plays an integral role at the Fortune 500, startups, and SMB’s, helping these companies to protect user data and modernize their internal IT stack.
Okta, Inc. is a U.S.-based identity and access management company based in San Francisco. The company provides cloud software that helps companies manage and secure user authentication into applications, and for developers to build identity controls into applications, websites, and devices.
The company has built over 10 products from which they can aggressively cross-sell once onboarding a new customer. Each of these products is highly scalable and essential. Let’s dive into two.
- Single Sign-On – the ability to log in to multiple systems using one centralized process. IT teams now have one place to view, manage, and secure user access data for internal employees and external partners.
- API Access Management – Application programming interfaces are being built into almost every new application in the world. Okta offers the ability to view, manage, and secure APIs from one central point. This infrastructure service allows developers to focus on building the product while Okta handles user management and authorization. This process is highly desirable for large enterprise IT teams as well as startups.
Okta is offering services that make life easier for IT teams. This concept is powerful and simple. IT teams prefer the cloud because they do not want to handle on-premise equipment. So why would they want to handle API management and authentication in house?
Per Todd McKinnon, Chief Executive Officer and co-founder of Okta, “Organizations around the world have made it clear that identity is the foundation for their digital transformation projects and zero trust security environments. Okta is the recognized leader in identity and we’re confident in our ability to capture more of the massive market opportunity.”
According to Pitchbook, OKTA is trading at 10x EV/Revenue. Considering OKTA is growing revenue at 62% year over year, this is a modest valuation well below historical averages of 16-18X forward revenue for a high-growth SaaS stock.
The business is clearly finding its stride. Revenue growth is accelerating, up from 43% in 2021 to 62% for the trailing twelve-month period.
Gross margins are healthy, remaining around 70%.
Analysts are forecasting robust revenue growth in coming years and the company seems well up to the task. Okta’s Remaining Performance Obligations (subscription backlog) is $2.7 billion. This represents future revenues that are expected to be recognized in alignment with performance of the contract.
With much of the bad macro news already heavily discounted, we view the purchase of OKTA as an asymmetric trade.
The company has a fortified balance sheet with $2.5 billion in cash and does not need to raise additional capital. OKTA is free-cash-flow positive with minimal interest and capex expenses.
Okta, Inc will be a leading SaaS stock as market sentiment improves with time.