- The authentication business has growth potential, but the industry is highly competitive, with cloud giants presenting a significant risk to smaller companies.
- The three peers have their distinctive business focus, making them viable for a diversification bundle approach.
- On a relative basis, TWLO seems to have the growth and pricing advantage over peers.
Security and authentication companies are a part of an emerging industry, which brings additional risks as investors stress test their business models. Instead of picking a single winner, investors may choose a bundle of companies that are targeting the same industry, as a way to spread their risk.
In this analysis, we will compare Okta, Inc. ( NASDAQ:OKTA ), Twilio ( NYSE:TWLO ) and Akamai Technologies ( NASDAQ:AKAM ) on a fundamental basis, and see if their relative valuation makes sense for investors.
Note: Investors are noticing high market volatility these days, however the analysis can enable investors to be more informed after the dust settles.
The Business Models
As companies change over time, it is always good to freshen up on how they approach business and what do they actually sell. As we will see, most of these companies have heavy overlap in the offered features, but a tilt towards different business needs, which may make them attractive as a diversified bundle.
Okta along with their recently acquired Auth0 mainly offer authentication services to companies. They focus on large enterprise software as it has more complexity, consequently driving business. Okta is well positioned for clients that seek independence from the large cloud providers like Microsoft's ( NASDAQ:MSFT ) Azure, Amazon's ( NASDAQ:AMZN ) Cognito and Alphabet's ( NASDAQ:GOOGL ) G-Cloud Identity and Security features. However, they are competing for the same market share, which means that the company needs to find ways to innovate, retain customers over time and outcompete the frequently cheaper cloud giants.
Twilio is a marketing itself as a customer engagement platform. The cloud SaaS that became famous for allowing businesses to send SMS notifications at scale now has expanded its services and is also offering authentication. Compared to Okta, Twilio's tilt is for customer facing apps meant to drive sales and user retention.
Finally, we have Akamai, which is an edge cloud deployment provider with a security and attack deflection tilt. This company allows clients to position their software in a dispersed manner around the globe. Their main differentiation is defense against active threats, and has managed to gain contracts with U.S. and foreign governments. Their sales are also well diversified, with a rough half-half split between U.S. and international clients.
In essence, all of these competitors sell cloud authentication, but the rest of their service palette is varies, allowing investors to utilize them in a diversification strategy. Next, we will compare valuation multiples between the stocks.
As some of the listed companies lack stable earnings, we can focus our analysis on the top-line performance and factor-in the implied growth for each company.
In the chart below, we see how the companies were trading on a price to sales basis. This gives investors a good sense of the expected revenue growth between peers versus the 5.4x 5-year average industry price to sales ratio.
We can see that the lowest P/S company - Twilio has about the same revenue growth potential as Okta, which may indicate that the stock is being overlooked by investors, and whatever problems the young company may face, it has a chance to recover. Akamai on the other hand, seems to be trading at a reasonable and stable 3.9x ratio while the company has an expected 8.2% annual revenue growth rate and is already profitable.
This technology still has vulnerabilities and hackers occasionally find ways in - recently, news broke that an attacker breached information from an interconnected system between Okta and Twilio. It is likely that these attacks will continue and may even be an opportunity for investors which see them as a temporary hurdle, but are generally bullish on the technology.
Looking at individual peers, it seems that Twilio is a possibly underpriced stock . Analysts are continuously reducing their price targets for the company, but even with today's estimates, the company has a target of $139.69 per share, representing more than 100% upside.
The Bottom Line
Investors that are bullish on the growing need for authentication software, may choose one or more companies tackling this relatively young industry. As business moves to the cloud and work can be conducted from remote locations, more companies will need to implement authentication for their services. Additionally, complex enterprises must be more mindful of their company's security while user-facing software needs to be complacent with an increasing amount of regulation which further drives business to these companies.
All mentioned companies have their individual business tilt, which makes them attractive for different segments. Since successful business models are hard to predict, investors may consider a combination of multiple companies that are tackling this industry.
On a forward relative value basis, Twilio has some attractive characteristics which may warrant a further deep dive into the company's fundamentals.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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