I am finally warming up again to Okta (NASDAQ:OKTA) after a brief period on the sidelines. The cybersecurity company is showing real signs of accelerating growth rates, yet the fundamental momentum is not being reflected in the stock price or valuation. The company has a net cash balance sheet, is generating positive cash flow, and appears within striking distance of GAAP profitability. There is still some uncertainty regarding competitive threats given the perceived commoditized nature of the product, but thus far these fears have remained just that. Management continues to guide conservatively, but I am gaining confidence that they may be able to return to a “beat and raise” cadence moving forward. I am upgrading the stock to buy.

OKTA Stock Price

I last covered OKTA in April, where I reiterated my neutral rating given my low confidence in the company’s growth prospects against its then-valuation. The stock has underperformed the broader markets since then, but the company’s latest results indicate that my hesitance may have been misplaced.

Given the company’s strong balance sheet and solid profitability, the valuation looks attractive at these levels, even if the growth story isn’t as clear-cut as typical cybersecurity names.

OKTA Stock Key Metrics

OKTA is an enterprise tech company in the cybersecurity sector, offering identity and access management products. An easy way to think about their products is like “two-factor authentication” for enterprises, to secure all apps made available for employees.

In its most recent quarter, OKTA delivered 19% YoY revenue growth, surpassing guidance for 17% growth.

OKTA saw current remaining performance obligations grow 15% YoY to $1.949 billion, surpassing guidance for 13% growth. That strong result may indicate that revenue growth should remain in the double-digits at least in the near term.

OKTA reported an 111% trailing twelve months dollar-based net retention rate, representing stabilization from the fourth quarter. I view this to be a solid result given that many tech names have seen pressure to customer headcount growth amidst the higher interest rate environment and the rise of generative AI.

On the profitability front, OKTA generated a 21.6% non-GAAP operating margin, crushing guidance for 18%. Notably, the $47 million GAAP operating loss was a large improvement compared to prior quarters and shows clearly how close the company is getting to GAAP profitability.

OKTA ended the quarter with $2.3 billion of cash versus $1.2 billion of debt, representing a strong net cash balance sheet.

Looking ahead, management has guided for the second quarter to see up to 14% revenue growth and 11% cRPO growth. Consensus estimates call for $633 million in revenues.

For the full year, management raised revenue guidance only slightly from 11% up to 12%. Given the size of the beat in this past quarter, it is clear that there is a great deal of conservatism baked into that target.

On the conference call, management noted that their cautious guidance is due to them still assessing the impact from their October security incident. Yet even if growth does end up slowing at some point, management appeared to remain optimistic about long-term prospects, stating that they “are not here to be a slow growth company” and are still aiming to accelerate growth rates. Management noted that they did see some of the headcount pressures facing other software peers but noted that they have been able to offset declining seat count with new products. It is possible that OKTA, like other headcount-based software peers, may eventually see a macro-related boost to growth rates as their customers return to historical hiring patterns.

Is OKTA Stock A Buy, Sell, or Hold?

OKTA is one of the stocks that investors have seemingly labeled as being in the crosshairs of the “software death star” in Microsoft (MSFT), but based on the company’s assessment as well as a cursory glance of user reviews, OKTA still appears to be offering a stronger product.

I am of the view that Wall Street is missing the big picture here. OKTA has a recurring revenue base backed by a net cash balance sheet and positive free cash flow generation. The company may be able to achieve GAAP profitability within 1 to 2 years if management allows operating leverage to take hold. I can see the company sustaining at least 35% net margins over the long term but will use 30% for modeling purposes. Yet, the stock recently traded hands at just around 6x sales.

That implies a 20x long-term earnings multiple, which looks too low given the projected double-digit forward revenue growth rate and aforementioned strong balance sheet. I can see the stock eventually re-rating to the 8x sales range, equating to around 26.6x long-term earnings. Between the double-digit growth rate and multiple expansion potential, I can see OKTA beating the market from here over the long term.

OKTA Stock Risks

It is possible that the October security incident (along with the numerous others) just have not yet impacted the financials as of yet. Perhaps there are some large renewals coming up that may not go as smoothly as planned. Perhaps MSFT is able to take increasing market share and pressure the growth rate. OKTA is not yet GAAP profitable, and thus the stock might exhibit great volatility under poor market conditions.

OKTA Stock Conclusion

OKTA is not growing as fast nor as profitable as more famous cybersecurity peers like CrowdStrike (CRWD), but the stock looks attractive in its own right. For one, the stock trades at much lower multiples on a price to sales basis and the company still has a net cash balance sheet and non-GAAP profitability. I can see the stock delivering solid double-digit returns from here, especially if revenue growth can eventually accelerate. I am upgrading the stock to buy.