Okta (OKTA) may be slumping into tonight's earnings release, but three key upgrades ahead of that might embolden more speculative players promoting a buying opportunity.
Shares of the San Francisco-based cybersecurity company were down about 2% on Wednesday, adding some caution on valuation concerns and a less than ideal chart setup into the release.
However, this obscures the long term leadership position available to the company in the key spaces of cloud and cloud security.
Despite the valuation worries sidelining many stock watchers, the company has coaxed upgrades from analysts at Needham, SunTrust, and a bullish initiation at Cowen on the intermediate to long term prospects, raising consensus targets to provide a modicum of upside.
"[Identity and Access Management] represents a fast growing segment of security which has taken on new significance in a cloud/SaaS dominant world and become a top security spending priority," Cowen analyst Nick Yako said in a recent target raise to $150 per share.
He cited the endorsement the stock has received from IT industry data leader Gartner (IT) as a stalwart in the evolving cybersecurity space.
"Okta leads the pack," a recent Forrester report cited by Gartner reads. "In the future, Forrester expects the vendor to enable hybrid IT environments, lay a foundation for Zero Trust by removing trust from static credentials, and offer adaptive and continuous authentication to respond to changing user risk levels even at and after authentication."
Building on those themes, Needham's Alex Henderson noted that Okta still has "plenty of room for upside" based on customer spend that is largely insulated from macro impacts due to its integral nature in enterprises. He said he expects the company to beat estimates and raise guidance, keeping investors onside despite a massive multiple.
"There are a handful of companies that look to be major winners in these transitions including Zscaler (ZS) , CrowdStrike (CRWD) , ProofPoint (PFPT) , Mimecast (MIME) in what we are calling a Cloud Federated Security Model," he explained. "We think Identity is the primary connective tissue between these cloud platforms. Okta is rapidly becoming the De-Facto standard in Identity."
He noted that the central role that Okta plays in cloud-based security makes it a linchpin to the secular shift.
"Accordingly, we are 'price insensitive'," Henderson said, eschewing valuation qualms. "We realize these multiple are baking in a lot of goodness, but think they are justified by the scale and length of the opportunities."
While the broader estimates still remain relatively cautious given those valuation dynamics and sizable stock moves year to date, the long term prospects for the Okta in particular remain largely encouraging as tech dynamics shift.
"Okta benefits from multiple secular tailwinds, including the transition to SaaS applications and cloud computing, demand for better user experiences, and a need for tighter security around identity and access," Baird analyst Jonathan Ruykhaver explained. "We are optimistic on the expansion of identity and access management, specifically a growing importance for security and vendors finding ways to increase business value for customers."
With much of the company's revenue base concentrated in the U.S., there also remains significant upside on international expansion.
What Could Go Wrong?
The main concerns that are promoting Baird's more cautious approach and price target compared to Ruykhaver's peers pertain to both valuation and competition. The latter could be more pertinent given the bullish view's acceptance of Okta as a long term leader.
"We think the identity and access management market is strategic, evolving,large and growing, all characteristics that would attract legitimate competition," Ruykhaver told clients. "While Okta has fought off the competition thus far, we become slightly wary when the infinitely resourced hyper-scale compute companies get involved."
He cited the legacy interests of Microsoft (MSFT) , as well as the inroads of Amazon (AMZN) and Google (GOOGL) as serious risks given their deep pockets. That is not to mention other younger competitors like Idaptive and Ping Identity.
While most expect Okta to continue to grow market share against some of the slower moving and less focused competitors in the space, it will be pivotal to continue in the company's progression in the upcoming earnings release towards more significant market share as its multiple remains elevated.
On that end, Real Money contributor Timothy Collins noted the secular growth as well as company specific data from previous earnings is likely driving much of the upside targets ahead of earnings.
"This Identity as a Service (IaaS) market is expected to grow to $24 billion by 2024, so there's a lot of market left for Okta to potentially capture," he noted. "[Okta] is gaining traction with larger enterprise customers as it continues to displace onsite legacy identity solutions."
Still, he noted that expectations remain high and the options-implied double digit move on earnings adds a high-risk, high-reward element to trading the stock ahead of the print.
For more on how he is positioning himself ahead of the anticipated earnings and research flow, click here.