We came across a bullish thesis on Okta, Inc. (OKTA) on Substack by Antonio Linares. In this article, we will summarize the bulls’ thesis on OKTA. Okta, Inc. (OKTA)’s share was trading at $81.69 as of Dec 19th. OKTA’s forward P/E was 27.86 according to Yahoo Finance.
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Okta, a leader in cloud identity management, is well-positioned to capitalize on the exponential growth opportunities presented by the proliferation of AI agents. The company has spent 17 years developing a robust platform for managing digital identities, a foundational layer for businesses transitioning to the cloud. As AI agents begin to transform workflows and systems, Okta’s revenue per customer could increase non-linearly while its cost structure remains relatively stable. Despite this potential, Okta is currently trading at a modest price-to-sales multiple of 5.5x, suggesting the market has yet to fully account for its transformative potential.
The company’s identity management software, which enables organizations to manage employee and customer identities securely in the cloud, has historically been constrained by the complexity of integration into existing IT systems. This has slowed customer acquisition due to the “forklift upgrade” nature of deploying Okta’s solutions. However, the rise of AI agents, which are expected to replace significant portions of the workforce and client base, could serve as a catalyst for Okta’s growth. This shift is likely to have two key effects: a substantial increase in the number of identities managed by existing customers and an elevated importance of Okta’s solutions in managing AI-powered tools.
Launched in late FY2024, Okta AI is designed to address these emerging needs. The tool operates similarly to CrowdStrike’s XDR engine, generating data to train AI models that detect potential threats and respond automatically by logging out users as needed. This AI-driven approach enables Okta to continuously improve its models, creating a virtuous cycle of enhanced functionality, increased customer retention, and upselling opportunities. The accumulation of proprietary data further entrenches Okta’s competitive edge, as its expanding dataset reinforces its ability to address an increasingly complex array of AI-related challenges.
This operational model resembles the “Nvidia Algorithm,” a pattern observed in successful technology companies that leverage decades of development to trigger exponential growth when technological shifts align with their strengths. Like Nvidia and Palantir, Okta has positioned itself to benefit from the rising demand for computational power and advanced digital solutions. The company’s recent traction with U.S. federal clients, including significant deals in FY2025, underscores its strong competitive positioning, reminiscent of Palantir’s early success in securing high-stakes government contracts.
Okta faces competition from Microsoft, particularly through its Entra platform, but the company’s founder-led focus on cloud identity management provides a clear strategic advantage. CEO Todd McKinnon has emphasized that Microsoft’s broader scope dilutes its ability to compete effectively in this specialized domain, leaving Okta with an edge in providing neutral, best-in-class solutions. As cloud identity management becomes increasingly critical in a fractal digital economy, Okta’s singular focus on this domain positions it as a key enabler of the AI-driven future.
Financially, Okta has demonstrated resilience despite macroeconomic headwinds. Post-pandemic, customer expansion slowed due to reduced hiring, reflected in a decline in the company’s dollar-based net retention rate from 123% in Q1 FY2023 to 108% in Q3 FY2025. However, this decline appears cyclical rather than structural, with management attributing it to a temporary slowdown in seat expansions. Encouragingly, bookings from new products accounted for 15% of total bookings in Q3 FY2025, signaling growing adoption of Okta’s expanded offerings. This metric, which has increased year-over-year, will be crucial in assessing the company’s ability to drive long-term growth.
Moreover, Okta has significantly improved its profitability over the past two years through efficiency initiatives. Gross margins have increased beyond pre-FY2023 levels, and cash from operations has surged to over $600 million in the trailing twelve months, representing approximately 23% of total revenue. These financial achievements highlight Okta’s ability to enhance its operating leverage, even amid challenging market conditions.
As AI agents become integral to digital ecosystems, Okta’s neutral stance and technological focus could enable it to outpace competitors and solidify its role as a foundational platform in the AI economy. While the company’s full potential remains underappreciated by the market, continued advancements in its AI capabilities and product offerings may unlock significant value. For investors, Okta represents a compelling opportunity to participate in the next wave of technological transformation.
Okta, Inc. (OKTA) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 47 hedge fund portfolios held OKTA at the end of the third quarter which was 50 in the previous quarter. While we acknowledge the risk and potential of OKTA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than OKTA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.