Okta (OKTA)

Identity management company Okta (NASDAQ:OKTA) announced better-than-expected revenue in Q2 CY2025, with sales up 12.7% year on year to $728 million. Guidance for next quarter’s revenue was better than expected at $729 million at the midpoint, 0.9% above analysts’ estimates. Its non-GAAP profit of $0.91 per share was 7.6% above analysts’ consensus estimates.

Company Overview

Named after the meteorological measurement for cloud cover, Okta (NASDAQ:OKTA) provides cloud-based identity management solutions that help organizations securely connect their employees, partners, and customers to the right applications and services.

As software penetrates corporate life, employees are using more apps every day, on more devices, in more locations. This drives the need for identity and access management software that help companies efficiently manage who has access to what, and ensure that access privileges are secure from cyber criminals.

Okta's primary competitor is Microsoft with its Entra ID (formerly Azure Active Directory) product. Other competitors include Ping Identity, ForgeRock, CyberArk, OneLogin, and cloud service providers offering their own identity management solutions.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Okta grew its sales at a 20% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Okta reported year-on-year revenue growth of 12.7%, and its $728 million of revenue exceeded Wall Street’s estimates by 2.3%. Company management is currently guiding for a 9.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.2% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and indicates its products and services will see some demand headwinds.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Okta’s ARR punched in at $2.85 billion in Q2, and over the last four quarters, its growth slightly outpaced the sector as it averaged 13.1% year-on-year increases. This performance aligned with its total sales growth and shows the company is securing longer-term commitments. Its growth also contributes positively to Okta’s revenue predictability, a trait long-term investors typically prefer.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Okta to acquire new customers as its CAC payback period checked in at 70.7 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like Okta, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Okta’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 76.9% gross margin over the last year. That means Okta only paid its providers $23.09 for every $100 in revenue.

In Q2, Okta produced a 76.9% gross profit margin, in line with the same quarter last year. On a wider time horizon, Okta’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Okta has done a decent job managing its cost base over the last year. The company has produced an average operating margin of 2.6%, higher than the broader software sector.

Looking at the trend in its profitability, Okta’s operating margin rose by 13.2 percentage points over the last year, as its sales growth gave it operating leverage.

In Q2, Okta generated an operating margin profit margin of 5.6%, up 8.6 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Okta has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 30.3% over the last year.

Okta’s free cash flow clocked in at $162 million in Q2, equivalent to a 22.3% margin. This result was good as its margin was 10.2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Okta’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 30.3% for the last 12 months will decrease to 26.9%.

Companies with more cash than debt have lower bankruptcy risk.

Okta is a profitable, well-capitalized company with $2.86 billion of cash and $940 million of debt on its balance sheet. This $1.92 billion net cash position is 12% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see Okta’s full-year EPS guidance top analysts’ expectations. We were also happy its revenue outperformed Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 1.1% to $92.60 immediately after reporting.

Updated: November 13, 2025 at 9:10 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Okta.

Okta isn’t a bad business, but we’re not clamoring to buy it here and now. First off, its revenue growth was strong over the last five years. And while Okta’s ARR has disappointed and shows the company is having difficulty retaining customers and their spending, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Okta’s price-to-sales ratio based on the next 12 months is 5.1x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $120.84 on the company (compared to the current share price of $83.88).