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Okta vs. Open Text: Which Cloud Stock is a Better Buy?

Cloud computing has become a necessity in the wake of the COVID-19 pandemic. Most organizations are now prioritizing storing their data on cloud and shifting their operations online. Consequently, we think prominent cloud stocks Okta (OKTA) and Open Text (OTEX) should continue to grow on the back of wider cloud adoption and on their innovations. But which of these stocks is a better pick now? Let's find out.

Enterprises worldwide have been upgrading to cloud infrastructure and accelerating the transition of their operations to the cloud. They are doing so on their increasing recognition of the benefits of scalability, lower capital expenditure, and reliability cloud computing brings to their business operations. In addition to adopting remote operational models, many enterprises have been prioritizing their spending on cloud computing, digital transformation, and artificial intelligence to benefit from a greater online presence for  their products and solutions and to better serve customers.

Cloud-sector participants Okta, Inc. (OKTA) and Open Text Corporation (OTEX) have played a vital role in accelerating digital transformation over the past year. While OKTA returned a hefty 639.7% over the past three years, OTEX has gained only 35.5%. In terms of year-to-date performance,  OKTA is a clear winner with 6.2% returns versus OTEX’s 0.5%.

However, let’s find out which of these stocks is a better buy now.

Business Structure and Latest Movements  

OKTA is a cloud security leading independent provider of identity for the enterprise. The company provides identity and access management tools that enable users to securely access cloud-based applications from various devices in the United States and internationally. With more than  6,500 pre-built integrations to applications and infrastructure providers, the company serves more than 9,400 organizations.

Last  December, OKTA joined hands with Amazon.com (AMZN) and made the Okta Identity Cloud and its products available on Amazon Web Services Marketplace. Global Okta prospects can now seamlessly purchase both Customer Identity and Workforce Identity products in AWS Marketplace, while also benefiting from new integrations that take advantage of AWS Control Tower. Moreover, OKTA also deployed the Okta Identity Cloud in December to secure identity and accelerate digital transformation for Canadian Western Bank, First National of Nebraska, and Nota, powered by M&T Bank.

Canada-based OTEX provides a suite of software products and services that enable organizations to gain insight through market leading information management solutions, on-premises or in the cloud. OTEX offers content services, business network, Cyber Resilience, OpenText security solutions, AI and analytics, and OpenText Information Management software platform.

This month, OTEX launched BrightCloud Cloud Service Intelligence. It enables Cloud Access Security Brokers (CASB) and other security and technology vendors to enforce data-centric security policies and prevent unwanted interactions with cloud services and associated applications. Furthermore, India-based Tata Power Delhi Distribution Limited, a leading power utility, recently collaborated with OTEX to implement OpenText Documentum as part of its  digital transformation journey. With help from Documentum, Tata Power has kept remote workers connected to critical business content and driven a nearly 35% increase in digital payments.

Recent Financial Results

OTKA is scheduled to release financial results for its fiscal fourth quarter, ended January 31, 2021, on March 3 In the third quarter, OTKA’s revenues increased 42% year-over-year to $217.4 million. Its subscription revenue also improved 43% to $206.7 million, due to continued demand for identity and access management services. Its total calculated billings were up 44% year-over-year to $252.4 million. Its non-GAAP EPS came in at $0.04, significantly improving from a year-ago loss of $0.03 per share.

OTEX’s total revenues for its fiscal second quarter ended December 31, 2020 grew to $855.6 million, increasing 10.9% year-over-year. Its Cloud Services and Subscriptions generated $350.5 million in revenues, improving 41.1% year-over-year. Its annual recurring revenues (ARR) grew to a record $684.9 million, up 21.5% year-over-year, representing 80% of its total top-line. And its adjusted EPS for the quarter was $0.95, rising 13.1% compared to the year-ago value of $0.84.

Past and Expected Financial Performance

OKTA’s revenue and total assets grew at CAGRs of 49.8% and 111.1%, respectively, over the past three years. Also, the CAGR of the company’s free cash flow has been 150.6%.

The market expects OKTA’s revenue to increase 32.6% in the current quarter (ended January 31, 2021), 40.4% in its fiscal year (also ended January 31, 2021) and 30.6% next year. OKTA’s EPS is expected to grow 116.1% in the current year but decline  80% next year. However, its EPS is expected to grow at a rate of 25% per annum over the next five years.

In comparison,  OTEX’s revenue and total assets grew at CAGRs of 7.8% and 8.1%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 28.3%.

The market expects OTEX’s revenue to decline 0.2% in the current quarter (ending March 31, 2021) but improve 6.1% in the current year (ending June 30, 2021), and 2.8% next year. The company’s EPS is expected to rise 13.1% in the current quarter, 12.5% in the current year, and 4.6% next year. Moreover, OTEX’s EPS is expected to grow at a rate of 6.8% per annum over the next five years.

Profitability      

OTEX’s trailing-12-month revenue is more than four times OKTA’s. In addition,  OTEX is more profitable with a net profit margin of 2.7% versus OKTA’s negative value.

OTEX’s ROE and ROA of 2.3% and 4.4%, respectively, compare favorably with OKTA’s negative values.

Valuation

In terms of trailing-12-month p/s, OKTA is currently trading at 44.11x, 1,089% more expensive than OTEX, which is currently trading at 3.71x.  OTEX is also less expensive than OKTA in terms of trailing-12-month p/b (3.07x versus 51.48x).

In terms of trailing-12-month price/cash flow also, OKTA’s 297.15x is 2,631% higher than OTEX’s 10.88x.

OTEX looks much more affordable here.

POWR Ratings

While OTEX has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system, OKTA has an overall rating of D, which translates to a Sell.  The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

In terms of Value Grade, OTEX has a B grade given its lower-than-industry average p/e ratio. In contrast, OKTA’s Value Grade of D is consistent with its stretched valuations.

While OKTA has a Stability Grade of C, OTEX has a grade of A, reflecting its lower volatility compared to its industry peers.

Moreover, of 109 stocks in the Software - Application industry, OTEX is ranked #2.  OKTA is ranked #53 of 60 stocks in the Software - Business industry.

Beyond what I’ve stated above, our POWR Ratings system has also rated both OKTA and OTEX for Growth, Momentum, Sentiment and Quality. Get all the OKTA ratings here. Also, Click here to see the additional POWR Ratings for OTEX.

The Winner

Migration to the cloud is a top imperative for the world’s largest organizations as they reimagine their digital customer experiences. Today’s remote work landscape has created additional challenges for organizations in making this migration because  they need to rapidly ensure connectivity and security for employees and customers alike.

Gartner expects global enterprises to spend 14.2% of their IT budgets on shifting to cloud computing by 2024, up from 9.1% in 2020. Hence, both OKTA and OTEX are good long-term investments considering their market dominance and consistent innovations. However, OTEX appears to be a better buy based on the factors discussed here.

OTEK has demonstrated strong operational excellence over the past year. The increasing demand for the company's Information Management cloud offerings  positions it well to achieve market share gains through continued alignment with customers' digital transformation and business needs. OTEK’s partner relationships and robust financials further provide the company ample opportunity to generate substantial long-term value.

Want More Great Investing Ideas?

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OKTA shares were trading at $257.56 per share on Thursday afternoon, down $12.34 (-4.57%). Year-to-date, OKTA has gained 1.30%, versus a 2.73% rise in the benchmark S&P 500 index during the same period.



About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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