Okta's Growth Reset: Solid Financials Mask Underlying Risks

What happened

Okta reported strong FY25 financial results with revenue growing 15% to $2.61 billion, as highlighted in a Forbes article questioning whether this reset presents a risk or opportunity. However, the DeepValue master report indicates this growth represents a deceleration from historical levels, with dollar-based net retention at only 106% and intense competitive pressure from Microsoft and other platforms. The company has pivoted to profitability and generates solid free cash flow, but its reputation remains vulnerable due to past security incidents and high stock-based compensation. Valuation metrics are stretched, with the stock trading at approximately 75x trailing P/E and 47% above an FCF-based DCF estimate, limiting the margin of safety. Consequently, while Okta's operational improvements are notable, the investment stance remains a cautious 'WAIT' until valuation or risk factors improve.

Implication

Okta's recent revenue growth, while positive, masks deeper issues such as decelerating expansion rates and competitive threats that could erode future pricing power. The stock's premium valuation, at ~47% above intrinsic value estimates, leaves little room for error, requiring flawless execution on security and customer retention to justify current levels. Persistent risks from hyperscaler bundling, particularly from Microsoft Entra, and potential security lapses could trigger multiple compression and share price declines. Monitoring key metrics like dollar-based net retention, RPO conversion, and incident-free periods under the Secure Identity Commitment is crucial for any shift in investment thesis. In the near term, investors are better served watching for catalysts such as a material price correction or evidence of structural FCF growth above current assumptions before committing capital.

Thesis delta

The new article reinforces Okta's revenue growth narrative but does not alter the core thesis from the DeepValue report, which emphasizes that growth has reset to lower levels amid ongoing risks. No fundamental shift is warranted; the investment recommendation remains 'WAIT' due to valuation concerns and unaddressed competitive and security challenges.