Better Buy: Okta vs. Palo Alto Networks

okta (OKTA -4.45%) Y Palo Alto Networks (PANW -2.59%) they compete in similar niches, but their recent stock returns couldn’t be more different. Okta shares are down more than 70% since the start of 2022 as the company struggles to integrate a huge new platform. Meanwhile, Palo Alto Networks is gaining market share and looking for sustainable profitability for the first time in years.

Unsurprisingly given those divergent operating trajectories, there is a large valuation gap between these businesses. But which one is likely to deliver the best returns from here on out for patient investors with a multi-year time frame?

Latest market share trends

At first glance, Okta might seem like the best growth stock. Sales were up 43% in its most recent fiscal quarter compared to a 27% increase reported by Palo Alto Networks. However, Okta’s momentum is not that strong. Sales growth fell short of management’s expectations for a broad enough brand to lower its outlook for the full year. Meanwhile, Palo Alto Networks raised its forecast for the fiscal year.

A deeper look at its sales trends shows that Okta could have an extended period of weaker growth ahead of it. It closed on the acquisition of Auth0 in May 2021, but the integration of that business hasn’t gone as smoothly as executives had hoped, and they are now reassessing Okta’s potential to reach its goal of $4 billion annual sales by 2026. Palo High Meanwhile, Networks, which has done a better job of steadily expanding its portfolio of security services, believes it can expand sales at a rate of 20% this year to about $7 billion.

Yield Matching

Palo Alto Networks is also the clear winner when it comes to financials. In its fiscal fourth quarter of 2022, ending July 31, it achieved profitability for the first time in several years, helped by rising prices and a growing customer footprint.

And while Okta hopes to eventually reach a free cash flow margin of around 20%, Palo Alto Networks’ margins are already well above that level. Management expects cash flow to be more than 30% of sales this fiscal year, in fact. Chief Financial Officer Dipak Golechha told investors to look for more profitability gains in the future, including a “balance of growth and margin expansion.”

Comparison of values

It’s no surprise that Okta is valued at a deep discount, given its growth and earnings struggles. While investors were paying more than 20 times earnings for the stock at the start of 2022, its current price-to-sales ratio is less than 6 compared to Palo Alto Networks’ 10. That gap could lay the groundwork for better returns if Okta can turn things around. Okta could also have more attractive growth potential as it capitalizes on high demand in the digital identity management and network security spaces, as evidenced by its sales spike of more than 40%.

But most investors will want to watch Okta from the sidelines until there is clearer evidence that its market share trends are improving again. With a shaky sales position in its core services, the company will not be able to fully capitalize on the demand for cybersecurity in the coming years. Okta’s recent stumbles could just be temporary hits from a complicated acquisition. But Palo Alto Network already has strong sales growth, cash flow and profitability, so investors might prefer its stock today.

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