It might seem a little daunting to invest in companies that haven’t generated a consistent profit and trade at high valuations. But fast-growing companies are sometimes unprofitable in the early years because they are investing heavily to expand their operations to meet demand.
Companies with huge addressable markets are usually undervalued by investors — that’s why growth stocks, as a group, tend to outperform. Growth stocks can be volatile in the short term, but the long-term payoff could multiply your initial investment.
With that in mind, let me tell you why…
A fast-growing business service
Since its IPO in 2017, shares of Okta have been on a tear — up 348%. The company makes it easy for organizations of all sizes to connect employees with applications through the Okta Identity Cloud platform. With its range of solutions and services, Okta is making IT integration and identity management easier and more secure for corporations of all sizes.
Identity management is a large and expanding market as companies embrace the cloud and look for simpler ways to manage online connections with employees. Okta is the leader in this increasingly important market, serving more than 6,100 clients in nearly every industry. The company’s reputation is winning new customers and deepening relationships with existing ones. Revenue has exploded from just $38 million in 2015 to $487 million on a trailing-12-month basis.
Management continues to prioritize long-term growth over short-term profit, which will make the share price volatile. The company’s net loss swelled to $155 million over the last year, but Okta is still a relatively small business and is just getting started on winning contracts with some of the largest companies in the world.
The company reported that the size of its top 25 contracts booked in the second quarter was double the size of a year ago. As the company scales its technology to meet the needs of these high-value clients, profits should follow. The recent quarter shows that trend playing out, with the net loss margin narrowing to 7% from 20% a year ago. Okta is on the road to being a much larger and profitable business in 10 years. The stock has taken a breather in the last three months, down 19%, so this is a good time to consider jumping on board.
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