Takeaways from Okta's latest S-1 and updated valuation analysis: we'll learn something about investor psychology from how it trades

March 27, 2017

This morning Okta published an updated S-1 filing with crucial details on the valuation the company will be initially looking for from investors and the offering. A few key facts off the bat from the new filing:


1) The company is selling 11m shares at $13-15/share. Assuming the company is able to raise at least at the top of the range, it will raise $165m. 


2) There is a standard 15% greenshoe, so the offering will likely expand to 12.625m shares and raise $189m.


3) No existing shareholders (including VCs and the management team) are selling in the IPO.


4) The low-end of the range puts the enterprise value right around where the company last raised in 2015 (~$1.2bn). Given the company's strong success since then, that would be a disappointing outcome over the past few years and the fact that the range even starts there is a sign that valuations were aggressive even for the highest quality companies at the peak of the Unicorn bubble. 


5) Existing investors have paid $241m to date and will own ~87% of the company after the the offering. At the mid-point of the range, that represents a 4.7x return on average through IPO. 


There's reason to think they'll do better, though. With this new data, we can now see how Okta stacks up to other public SaaS companies from a valuation perspective. First, here's a refresher on how it looks from a growth efficiency standpoint, with a unique combination of high losses and high growth (even relative to other public SaaS companies):


Now, here's Okta's valuation relative to other SaaS companies at $15/share. One note: reported fully diluted share counts are a bit unfair because Okta has a truckload of options outstanding at an average exercise price of $6/share, meaning while the shares are dilutive, the company will get non-trivial cash as they are purchased. To adjust, I'm including the shares but also giving Okta credit for ~$100m of incremental cash in my model. 


Here, we see an interesting dynamic I covered in depth in my first post on the company, in which I scored Okta on various factors that mattered to me as a public markets investor: Okta has grown gross profit much faster than revenue in the past year, so it looks cheaper using my methodology when that is included on the x-axis as opposed to revenue growth. To me, the likely way this shakes out is a valuation at the high end of the comps using revenue growth (the chart on the left) and on the low end of the comps using gross profit growth (the chart on the left) for a final valuation in the ~12-13x gross profit range or $21-23/share. I wouldn't be surprised if Okta follows a very similar path as MuleSoft with the range raised to $15-17 and eventual pricing in the mid/high teens followed by a pop into the low-twenties. 


What makes Okta's IPO fascinating is that, per my first plot, we'll get to see how the market feels about high growth at a high cost. If Okta trades above $25, it is a sign investors are firmly in "growth mode." If it stays in the teens or hovers around $20, losses remain a key issue investors consider even for hyper-growth SaaS companies. My gut is that given the success of other recent IPOs and Okta's strong recurring revenue model and huge TAM the reception will be positive, but there's no way to find out until the company has gone through the roadshow and is trading publicly.

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