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Okta has recently been a disruptor in the traditional cybersecurity space. The key components of cybersecurity are enabling access control and safeguarding networks from hostile actors based on identification credentials, and that the loss of a clear security perimeter can increase the reliance of security teams on user-based cybersecurity. The traditional technique of safeguarding users and granting access to digital resources based on on-premises products was upended by Okta's cloud-based identity access solutions. Okta's cutting-edge user access and security solutions will give it a lasting presence, and I anticipate considerable margin improvement along with robust revenue growth. Through its worker identity and consumer identity products, Okta serves two main markets. Customer identification is used to enable a customer's customers, whereas workforce identity provides protection and permits access for a customer's employees, contractors, and partners. With a strong integration network that streamlines identity access and security standards for the applications that its clients depend on, Okta combined these two separate marketplaces into its identity cloud. I anticipate that Okta's solutions will be highly sought after by organizations looking to provide a smooth application access experience for their customers and employees while simultaneously maintaining network security. The complexity of cybersecurity is increased by the rising use of cloud-based resources by distributed, always-connected workforces. The network of application integrations that Okta has, in my opinion, gives it a differentiating feature that is organisations may manageably grant identity access across all of their on-premises and cloud-based services. Okta is moving upstream to snag more business clients and expanding worldwide in addition to a rapidly growing customer base and gaining more clients with bigger deals. I anticipate that the company's growth strategy with significant clients undergoing digital transformation and market expansion activities will be aided by the fact that it has established itself as an attractive partner with major system integrators. I project consolidated non-GAAP gross margins to increase to 82% in 2032 from 77% in fiscal 2022, driven mostly by subscription goods that significantly outperform professional services offerings. I anticipate that during the coming ten years, sales and marketing costs will rise quickly, but sales as a percentage of expenses will fall as revenue increases even more quickly. The lower incremental expenses of servicing and upselling existing customers as opposed to acquiring new clients can be used to increase sales and marketing leverage. In the R&D and general and administrative spending lines, I predict similar dynamics. These variables lead us to predict that non-GAAP operating margin will increase to 26% in fiscal 2032 from 1% in fiscal 2021 and a negative 6% in fiscal 2022. Using my model, I got a fair value of $154, using a 13.5% discount rate (9.5% equity risk premium), terminal free cash flow margin of 32%, and terminal growth rate of 5%. I model the CAGR for the next 10 years to be around 25%, which is reasonable considering the rapidly growing nature of the market.


Moat


I rate Okta as having a narrow economic moat, mostly through network impact and secondarily through customer switching costs. Today's hybrid-cloud ecosystems make it difficult to maintain a clear security perimeter, which forces security teams to rely on user identity to provide or deny access to resources whether they are inside or outside of a trusted network. How businesses and governments secure their internal users and customers has been significantly affected by Okta's cloud-delivered software solutions for identity-based cybersecurity. Security and networking teams can be severely disrupted by switching identity access providers, therefore I think Okta's user-based cybersecurity strategy, along with its growing client base and suite of products, will give it a long-lasting competitive advantage. Solutions for consumer and employee identities are offered by Okta. The more established product, workforce identification, which accounts for the majority of sales, is designed to safeguard and support an organization's partners, contractors, and workers. Customer identification protects a customer's customers and gives the end-user a smooth experience. Customer identification solutions were traditionally purchased or created within IT networks, whereas worker identity solutions were highly customized purchased products that were integrated into a customer's own on-premises infrastructure. These solutions were often provided by various suppliers and were expensive to develop, maintain, and modify in response to changes in the business environment or infrastructure. Customers also detest switching identity cybersecurity vendors because it's crucial to make sure that both internal and external users can easily access the information they require. I think Okta changed the identity protection landscape by being the only cloud-based and cloud-delivered identity protection solution, enabling security teams to safeguard identities as more cloud-delivered resources and applications are used, more people are freed from network dependence, and more organizations accept the idea that their trusted networks still require protection. The Okta Identity Cloud is a key component of Okta's differentiator since it gives customers a centralized way to enforce the many components of the user security and identity stack. Okta offers a more seamless experience and makes it possible for a consistent security strategy independent of a user's location, device, or network by being where resources are consumed. The workforce identification and customer identity products from Okta fall under two broad product groups, each of which includes a range of solutions that address the general trends in user access and security. Instead of using different suppliers for each component, Okta's platform strategy, which addresses workforce and customer security requirements, aims to give customers better integration and simpler management as more peripheral solutions are bought. Workforce identification products such as single sign-on (SSO), multi-factor authentication (MFA), universal directory, lifecycle management, API access gateway, advanced server gateway, and access gateway are aimed at safeguarding the workforce and improving user experience. These products are offered for sale per user. Employees may access all of their applications with single sign-on (SSO), and security teams can quickly scale up and down application rights per user. SSO is a potent tool that security teams rely on to provide a better user experience and strengthen security posture due to the important nature of guaranteeing users can access their apps while safeguarding that unauthorized users cannot utilize such resources. MFA is a technique for verifying a user's identity that involves having the user carry out a secondary task after inputting their credentials, including providing their biometric data or entering a text message code. Because Okta's MFA offers extra contextual checks based on location, network, and devices, relying solely on a password has become an outdated security technique, especially for untrusted networks. A single repository for managing users, groups, and devices is offered by universal directories. Although a centralized directory has always been a key component of security teams managing their personnel, Okta's solution's cloud-based design makes it a desirable option for organizations moving resources into different cloud architectures. Lifecycle management assists in automating changes to a user's access together with a universal directory along the adjustments that take place while working. Okta's access gateway, which is included in both solutions, was developed in response to customer requests to upgrade their on-premises identity security stack to a cloud-like experience. Many clients already have on-premises apps tailored to their needs, but they want to move more quickly to the cloud in order to take advantage of features like development and analytics capabilities. Without needing customers to change their networking setup, Okta's access gateway offers its cloud-based security capabilities for on-premises resources, combining with cloud-delivered resources. As a combination of public, private, and on-premises resources, hybrid-cloud ecosystems are, in my opinion, the future of networking. Because Okta can support the entire networking stack, regardless of where the resources are located, it will continue to be an essential component of identity security. Authentication, authorization, user management, multi-factor authentication (MFA), lifecycle management, business-to-business connection, and access gateway are all included in Okta's customer identity solutions. These products are priced per authentication and are used to ensure that clients' customers are who they say they are. Many of the biggest firms use Okta as their customer authentication procedure for consumer and corporate purposes, from logging in to a streaming video service to logging in to a supplier portal, even though the majority of customers have no idea of this. Customers can create unique solutions that integrate Okta's identity platform with their online, cloud, and mobile apps for their end users using Okta's APIs. The assumption that users can access required resources quickly and securely is a crucial aspect of doing company in the digital age, and I think it would be difficult and expensive to switch security vendors from a reliable current one. As of December 2019, Okta's Integration Network had over 6,500 integrations from software application manufacturers, human resource management systems, firewall suppliers, and hyperscale cloud service providers. As entities may object to the idea of using the same vendor for their apps and user security due to vendor lock-in and the lack of clear access and security monitoring across other vendors' applications, it is offered as a vendor-agnostic option for customers. Regardless of the apps used from different vendors, Okta is offering the foundational infrastructure that enables customers to use their applications while ensuring user access and security. I think that as Okta develops new solutions that integrate with vendors and its vendors upgrade their software on a constant basis, more vendors and clients are drawn to this network's ability to streamline the processes necessary for user access and authentication. Customers experiencing their particular apps and cross-application traffic more seamlessly and securely benefits vendors. The volume of information and traffic moving through Okta's security stack increases as more suppliers sign on and add more of their solutions. Better products can then be created, attracting new integration partners, more capabilities, and quicker network deployment speeds. Security teams want all resources used within their network to be integrated together since identity access across the many applications and resources for consumers gets simpler and improved as more entities join the network owing to feature set and speed enhancements. Customers gain capabilities and the worth of Okta's products are made more clear with each additional integration that is added. Okta's technology offers connections into the fields within the apps, displaying a deeper network integration and features that could lead to new integrations. Competing integration technologies may provide a link to an application via a single sign on. I believe that the overall network effect enhances Okta's competitive position relative to rivals and supports the possible costs of switching providers due to the loss of essential vendor connections. Okta's outstanding top-line growth is evidence that its differentiating strategy is connecting with customers. Technology reviews throughout the past few years have rated Okta's products as among the best in their field. As the business grows, top-line growth will undoubtedly slow down, but I anticipate adequate operating margin leverage throughout this decade to demonstrate the capacity to produce long-lasting excess returns on invested capital. I see Okta as a land-and-expand business, meaning that if customers are acquired, income will eventually vastly surpass necessary costs, particularly the sales and marketing initiatives needed to create a market presence. Okta is moving upstream in order to increase the size of its enterprise clients, create larger initial contracts, and increase the number of products customers buy, all of which I believe will strengthen its ability to retain customers.


Capital Allocation


Okta’s capital allocation is exemplary. The ranking is based on my evaluations of a strong balance sheet, outstanding investment effectiveness, and suitable shareholder distribution practices. Together with executive vice chair and COO Frederic Kerrest, CEO and board chairman Todd McKinnon launched the business in 2009. Salesforce's previous chief of engineering was McKinnon, and Kerrest has experience in sales and business development there. The dual class stock profile of Okta consists of a Class A with one vote per share and a Class B with ten votes per share. McKinnon and Kerrest each have 5.7% (33.4% of the voting power) and 2.3% (13.4% of the voting power) of the shares of Okta as per the 2021 proxy statement. The overall ownership of Okta by all directors and executive officers was 9.6% (47.7% of the voting shares), albeit the proxy statement may understate this due to unvested shares. Although a small number of people have a significant impact on the business, I believe Okta's decision to allocate cash to growth was the right one to seize the potential in cloud-based identity access security. access control. Cash will likely be utilized more for acquiring new consumers and product development than for shareholder returns. Okta has a strong financial position at the conclusion of the fiscal year 2022, with $2.5 billion in cash and a $670 million net cash position. I believe Okta has flexibility for internal needs and potential acquisition activity due to the balance sheet and rising free cash flow. I do not anticipate Okta paying dividends; the company has not done so since becoming public in 2017. In its early years as a publicly traded business, share buybacks have not been a strategic priority, but I anticipate share dilution to moderate in the 2020s. To improve its capabilities in automating workflows across apps and services, Okta bought Azuqua for $52.5 million in 2019 and ScaleFT for $15.6 million in 2018. Okta paid Auth0 $6.5 billion in equity in 2021 to purchase its developer-focused customer identity and access management business. Even if the price paid for Auth0 seems high, I believe Okta used shares smartly to acquire a business that will quickly accelerate its disruption of customer identity and access demands. Furthermore, I think Auth0 addressed the gap Okta had with programmers who would want highly customised solutions for each application. I think that these acquisitions help Okta achieve its strategic objectives, and I anticipate more tuck-in purchases in this quickly changing market. The business's Okta for Good programme distributes money and offers special prices on Okta's products for a limited number of nonprofit organizations. Prior to its initial public offering, Okta


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