Overview

Okta is trading at a discount of 6x on revenue compared to software companies with similar characteristics, such as recurring revenue, high switching costs and a mission-critical product. Unlike many of these companies, it is also profitable and trades at a 21x multiple on next year’s free cash flow, while its margins are still immature and improving year over year.

Yet, the market is sophisticated and extremely smart, so there's probably a reason for this.

In this article, we will try to understand the rationale behind the current valuation, examine the business environment today, assess what is priced in, as well as explore both the bearish and bullish theses.

Background

Okta is a cloud-native company specializing in identity and access management for enterprise systems and resources through authentication and authorization management. It started with a workforce identity management solution (IAM) and expanded its portfolio to customer identity management (CIAM) through the acquisition of Auth0. Additionally, it offers Identity Governance and Administration(IGA), privileged access management (PAM), identity threat detection and response via the acquisition of Spera (ITDR), and, more recently, solutions partially addressing non-humen identity (NHI) solutions.

Reasons for the depressed valuation

Hypergrowth during COVID led customers to sign a large three-year contracts, expecting a significant increase in their number of seats over that period. At renewal, those contracts are expiring in a very different economic environment (budget cuts and conservative forecasts) creating headwinds for growth and key metrics as ARR and NRR.

Additionally, two negative events are compounding the bearish sentiment around the company:

1. In mid-2021, Okta acquired Auth0 for $6.5B. This transformative M&A led to severe integration challenges which were expressed in sales team confusion, reduced effectiveness, high turnover, and cultural integration difficulties.

2. Cybersecurity incidents:

   January 2022 - Attackers breached Okta's system and gained access to customer-related data. However, they did not extract sensitive information or compromise customer security.

   2023 - Attackers gained unauthorized access to third-party applications using Okta’s services by exploiting a partner account. Again, there was no direct breach of customer data.

   

Current Business Environment

Budget tightening and conservative spending are leading to smaller contract sizes. Additionally, some customers—particularly SMBs—are opting for Microsoft’s Entra ID instead of Okta’s solution. This has resulted in a decline in NRR to 108%, a slowdown in growth to around 15%, and a shift in customer mix toward enterprises compared to previous years. However, churn remains relatively low, with GRR at 95%-96%.

Okta is also launching two new solutions:

IGA (Identity Governance & Administration) – competing primarily with SailPoint.

PAM (Privileged Access Management) – competing mainly with CyberArk.

The PAM solution, however, has not yet seen broad adoption, and customers report that it lags behind competitors.

Meanwhile, in the IAM and CIAM segments, two legacy competitors—Ping and ForgeRock—are merging under Thoma Bravo, which previously acquired SailPoint as well (though SailPoint remains a separate offering).

Changing the go-to market strategy:

• Appointed a new head of sales.

• Restructured sales teams, with Auth0 sales reps focusing on the low end of the market and Okta's core sales team targeting C-suite.

• Focuses on the partner ecosystem which is strengthening, with the ten largest deals last quarter sourced via them, totaling $20M in ACV (Annual Contract Value).

  
  

In the last quarter, about 15% of total bookings came from IGA sales, with roughly one-third of new contract value attributed to IGA. The company has also won new contracts with public-sector organizations, which tend to be highly sticky customers. Overall, the customer mix is shifting toward larger enterprises, which are also more stable.

Breaking down the growth, the slowdown is primarily driven by SMBs (growing at ~5%), while larger customers are expanding their usage, a positive long-term indicator.

Additionally, Current RPO (Remaining Performance Obligations) is growing at 12%-14%, despite market expectations for 8%-9% growth over the next two years.

What’s Priced Into the Stock?

The market valuation today reflects:

A continued decline in NRR.

Lack of confidence in management’s execution.

Limited success in cross-selling beyond its IAM solution.

A lost of market share to competitors, mainly CyberArk and microsoft.

Bear case:

• Macroeconomic Deterioration in 2025 – IT budgets continue to prioritize innovation in firewall, endpoint security, and cloud protection, rather than identity security. This could further pressure Okta’s growth.

• Lack of Innovation Post-Auth0 Acquisition – The complex integration of Auth0 forced Okta to focus on fixing existing issues instead of driving innovation. Competitors as CyberArk are aggressively expanding into IAM, threatening Okta’s leadership.

• Leadership Turnover – Aside from the CEO, nearly the entire management team has changed, making it difficult to assess execution capabilities based on past performance.

• Customer Growth Slowdown – Okta appears to have exited its growth phase, and historically, once that happens, valuation multiples tend to compress. This could justify the company’s current market value.

• No Near-Term Plans for a Non-Human Identity Product – Okta has yet to introduce a solution for machine-to-machine identity management, which is expected to drive the next major growth phase in the identity sector. While the company acknowledges its importance, the Auth0 acquisition likely delayed innovation in this area. CyberArk currently leads this segment after acquiring Venafi, not necessarily due to superior technology but because of its ability to distribute the product effectively to their existing customer base.

Bull case

• Sustained competitive position in IAM & CIAM – Okta’s market leadership remains intact, with a stickier customer mix and a strengthening moat.

• Significant growth potential in CIAM – The customer identity market remains a large and underpenetrated opportunity.

• Acceleration in RPO growth – The cRPO is growing at an increasing rate, signaling acceleration in future revenue grwoth.

• Macroeconomic tailwinds from H2 2025 – An improving macro environment should lead to increased hiring and IT budgets, positively impacting NRR.

• Cross-Sell opportunity in IGA & PAM – The potential for growth from IGA and PAM solutions is not priced in, offering additional upside.

• Expansion into public-sector customers – Okta is making inroads into the government sector, known for its highly sticky, long-term contracts.

• Founder-Led – CEO and founder Todd McKinnon holds 4.6% of shares and 30% of voting rights, reducing the risk of a PE takeover.

• Auth0 integration issues are largely resolved – With most post-acquisition challenges behind it, Okta is now well-positioned to execute its growth strategy.

• Margin expansion driving cash flow growth – Even with ~10% revenue growth, Okta's improving operating leverage can drive 15%+ free cash flow growth.

• Improved capital allocation – The company is using cash more efficiently to avoid future dilution.

• Margin of safty – The downside in the event of the worst-case scenario is limited.

In summary, we have seen that several negative events led to a decline in expectations and a compression of multiples in a high-quality company. After a discussions with Okta's management, competitors, professionals in the field, several customers, and modeling of the future results, we concluded that the probability of execution improvement is higher than the probability of continued decline in business results.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Our hedge fund may hold positions in the companies discussed and may actively trade in these securities. Our views are based on publicly available information and our internal analysis, which are subject to change without notice. We encourage readers to perform their own research or consult with a professional financial advisor before making any investment decisions. We assume no responsibility or liability for any errors or omissions in the content.