Okta's $1 Billion Buyback Highlights Confidence But Faces Valuation Skepticism

What happened

Okta has announced a $1 billion share repurchase program, effective immediately, with management citing confidence in the business and a view that shares are undervalued. This move comes as the company has pivoted to solid profitability and strong free cash flow, supported by 77% gross margins and a large RPO backlog. However, the DeepValue report indicates Okta's stock is trading about 47% above an FCF-based DCF estimate, suggesting overvaluation rather than undervaluation at current levels. Revenue growth has decelerated to low/mid-teens amid intense competition from Microsoft and security incident risks, tempering optimism. While the buyback may boost EPS short-term, it raises critical questions about capital allocation efficiency if executed at elevated prices.

Implication

The buyback could provide temporary stock price support by reducing share count and signaling management confidence, potentially offsetting dilution from high SBC. However, with Okta trading at ~75x trailing P/E and above intrinsic value, repurchasing shares might destroy value if the overvaluation persists, diverting cash from growth investments or debt reduction. This is particularly concerning given competitive pressures from Microsoft Entra and other suites, along with ongoing security reputation risks that could compress multiples. For long-term investors, the move doesn't address core issues like slowing revenue growth or net retention challenges, and it may exacerbate valuation concerns if not paired with fundamental improvements. Thus, the implication is that the buyback is more of a cosmetic boost than a strategic shift, underscoring the need for patience until valuation aligns with cash flow prospects.

Thesis delta

The share repurchase program does not materially shift the investment thesis; Okta remains a quality business with strong cash flows but significant valuation and competitive headwinds. Management's optimism reflected in the buyback underscores confidence in long-term opportunities, but it doesn't alter the underlying risks of overvaluation, slowing growth, or security threats. Therefore, the cautious 'WAIT' stance persists, with any thesis upgrade contingent on a price pullback or evidence of sustained FCF growth above current assumptions.