Deutsche Bank (ETR:DBKGn) has adjusted its outlook on Okta, Inc (NASDAQ: NASDAQ:OKTA), a leading identity management company as the firm's analyst updated the price target to $115 from $125 while sustaining a Buy rating on the stock.
The revision follows the release of Okta's second-quarter fiscal year 2025 results, leading to updates in the firm's financial model for the company.
The analyst has revised the forecast for Okta's fiscal year 2025 and 2026 revenues to $2,562 million and $2,804 million, up from the previous estimates of $2,535 million and $2,859 million, respectively.
Additionally, the free cash flow (FCF) projections for the same years were increased to $595 million and $695 million, from the earlier estimates of $566 million and $653 million.
The new price target is derived from a discounted cash flow (DCF) model, which now implies a 6.6 times calendar year 2025 enterprise value to unlevered free cash flow multiple. The DCF assumptions include a weighted average cost of capital (WACC) of 9.3%, a terminal risk-free rate of 4%, an equity risk premium of 5.25%, and a terminal growth rate of 3.5%, which is in line with expected GDP growth.
The analyst pointed out potential upside risks for Okta, which include solid momentum from new product releases such as Privileged Access Management (PAM), Identity Governance and Administration (IGA), and Identity Threat Detection and Response (ITDR). Additionally, a move to a hunter-farmer sales model within the small to medium-sized business go-to-market team could lead to robust new customer acquisition.
Conversely, downside risks were noted, including the possibility of a worsening macroeconomic environment that could lead to reduced cybersecurity spending on identity and access management (IAM) modernization projects.
Other concerns include ongoing organizational challenges stemming from the integration of Okta with Auth0, increased competition from Microsoft (NASDAQ:MSFT) in workforce-IAM, and from ForgeRock and Ping Identity in Customer-IAM.
In other recent news, Okta reported a 16% year-over-year revenue increase to $646 million in its second quarter results, driven by a 17% rise in subscription revenue. Despite these positive results, the company's third-quarter calculated remaining performance obligations (cRPO) guidance fell short of projections.
Analysts from firms such as Piper Sandler and Canaccord Genuity adjusted their outlook on Okta, with Piper Sandler lowering the price target to $100 and Canaccord Genuity reducing it to $90.
However, BMO Capital Markets raised its price target to $103, citing Okta's robust growth in remaining performance obligations. Truist Securities, Baird, and Scotiabank also adjusted their price targets to $95, $105, and $92 respectively, due to concerns about Okta's growth, particularly in new business and the small to medium-sized business sector.
InvestingPro Insights
As Okta, Inc (NASDAQ:OKTA) navigates through its fiscal year with a revised outlook from Deutsche Bank, real-time data and insights from InvestingPro provide a clearer picture of the company's financial standing. Okta's market capitalization stands at $13.37 billion, underscoring the company’s significant presence in the identity management sector. Despite not being profitable over the last twelve months, Okta maintains a strong gross profit margin of 75.82%, reflecting its ability to retain a substantial portion of revenue after accounting for the cost of goods sold.
InvestingPro Tips highlight that Okta holds more cash than debt on its balance sheet, which is a positive sign of financial health and stability. Additionally, analysts have shown confidence in the company’s prospects, with 28 analysts revising their earnings upwards for the upcoming period. This optimism is also reflected in the prediction that Okta will become profitable this year. For investors seeking deeper insights, there are more InvestingPro Tips available, offering a comprehensive analysis of Okta's financials and market performance.
The recent price movement of Okta's stock has shown volatility, with a significant hit over the last week. However, the InvestingPro Fair Value estimate suggests a potential upside from the previous close, indicating that the stock may be undervalued at its current trading price. As the company approaches its next earnings date on November 27, 2024, investors and analysts alike will be watching closely to see if Okta can capitalize on its strong gross profit margins and turn analyst expectations into reality.
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