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2 Reasons Okta's Strong Growth Will Continue in 2020

Okta's (NASDAQ: OKTA) business continued to grow rapidly in its fiscal third quarter. Existing customers demonstrated their trust in the online identity solutions company by increasing their spending, and 400 new companies gave Okta their business. On the heels of strong customer success, Okta's top- and bottom-line results during the period both handily beat analyst estimates.

But can Okta keep growing so quickly? While investors should expect deceleration in the company's top-line growth rate throughout 2020 given how high its growth is today -- revenue increased 45% year over year in Q3 -- deceleration throughout 2020 may only be modest. Beyond the obvious secular tailwinds benefiting Okta, such as organizations' digital transformations and a growing need for online identity management, here are two reasons for investors to believe that more strong growth is on the horizon.

Image source: Getty Images.

1. Demand for Okta's products remains strong

While investors can, in part, gauge how strong demand is for Okta's products by looking at recent trends in revenue growth rates, some other key metrics can be used to provide a more holistic picture -- namely, a combination of current remaining performance obligations (current RPO) and billings.

"[W]e think looking at billings and RPO, especially current RPO, together is the best way to evaluate the strength of the business," said Okta CFO Bill Losch in during the company's fiscal third-quarter earnings call.

Okta's current RPO, or its subscription revenue that the tech company expects to recognize over the next 12 months, increased 52% year over year. Total calculated billings were up 42% year over year.

These robust growth rates bode well for Okta's growth prospects over the next twelve months.

2. There's big upside with enterprise customers

Growth in Okta's larger customers, or its enterprise customers, has been a key driver for the online identity specialist's business. Customers contributing more than $100,000 in revenue increased 40% year over year in Q3.

During Okta's earnings call, CEO Todd McKinnon said the was both pleased with how its enterprise customers are having a positive effect on results today and how they will probably be even more important in the future.

"I think enterprises is [...] very important to us and it's a big driver of our business overall," McKinnon said, "And I think that we're very, very optimistic about it, but I think the reality is that the success there is still fairly early considering the size of that market."

McKinnon went on to note that while its big deals are significant compared with the deal sizes it was landing in past years, "they're actually very small considering the overall problems we can solve for these customers." Okta's large deals, therefore, could get even bigger in the future.

Indeed, the size of contracts from these larger customers is already rising rapidly, giving substance to McKinnon's view. Annual contract value of customers contributing $100,000 or more to Okta's top line increased 50% year over year in Q3.

The opportunity in enterprise is "massive," McKinnon said.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Okta. The Motley Fool has a disclosure policy.


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