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In last week’s YouTube video QuickPick of Palo Alto Networks (PANW) I promised a longer take on the cybersecurity sector and another pick for my portfolios to go with Palo Alto Systems and CrowdStrike (CRWD).

This post is that (somewhat) longer take and OKTA (OKTA) is my promised pick for my Jubak Picks and Millennial portfolios.

The last couple of weeks–and news from Palo Alto Networks and FireEYE (FEYE)–have clarified what Wall Street is looking for in a cybersecurity stock. (Of course, what Wall Street thinks makes up a good cybersecurity pick doesn’t necessarily track with the long-term requirements for victory in the sector. In the short-term, however (and most of the time), that Wall Street consensus will drive share prices and separate winners from losers. In the current case, too, I think Wall Street has got the longer-term picture roughly right, as well.)

So what have we learned recently?

1. Wall Street believes the future is in cybersecurity as a cloud-based service and not as a product. FireEye’s sale of its product division and Wall Street’s general disappointment in the company’s performance are evidence of this conviction.

2. Wall Street’s preference seems to be for what analysts call “native” cloud-based security as a service models (such as newly public Sentinel One (S)) and there has been some skepticism about the ability of companies that started off with a product orientation–such was Palo Alto Networks and its roots in firewall protection–to make the transition. Palo Alto’s revenue growth in its most recent quarter has gone a long way to modify the degree of “native” preference, but I think we’re still in a show-me period for companies making this transition. (Which, of course, means that they’re cheaper than stocks seen as native. FireEye is cheaper than Palo Alto Networks which is cheaper than CrowdStrike which is cheaper than Sentinel. “Cheaper” stocks are only “cheaper,” of course, if the company can produce performance unexpected by Wall Street.)

3. And to be a success a company has to have AI and automation. These are buzz words, I’m sure you recognize, but there’s some truth to the buzz. The rapid evolution of cyber-threats means that a network that can learn to quickly identify new variants has a big selling point to customers. It’s emphasis on AI is one of the reasons that CrowdStrike has achieved such a heady valuation. Automation is a response to the current short-supply of IT workers who with the top rank skills necessary to run and update these incredibly complex and sophisticated security networks.

3. Wall Street is worried about the steady stream of new entrants into this sector. Will there be enough growth for everyone? Stocks of companies that can demonstrate the ability to grow revenue in the face of new competitors will see a big pop in share price–see for example Palo Alto Network’s 20% jump after its recent earnings report.

4. Given that stream of new cybersecurity startups Wall Street (and you) should be looking for older players with the cash to do acquisitions of new startups and their technologies and with a solid track record to finding the right acquisition and making it work. Palo Alto Networks looks to be building this kind of acquisition track record.

5. Everybody is afraid of Microsoft (MSFT). The company is building more cybersecurity capacity into its existing software and clearly has the cash to buy new technologies (and technology companies) when it needs to. One of the worries before the Palo Alto Networks earnings report was that revenue growth would show the impact of competition with Microsoft. That revenue and orders held up at Palo Alto was another reason for the post-earnings report pop in the stock.

6. In the face of the evidence intense competition, Wall Street is looking for hotter, higher growth trends in this already hot, high growth sector. One possibility–and the reason that I’m adding OKTA to my portfolios today–is identity security. The larger argument in favor of faster growth in this sub-sector is that post-Pandemic work places, which will mix in some proportion in office and from home work, will add another level of challenge to that posed by the increasing prevalence of company networks that use multiple input devices from smart phones, to iPads to desktops to access networks. The security task has shifted and will continue to shift from protecting the perimeter of a corporate network to the task of security the user and each devices. The key to what is the ability to secure and protect identities so that the user signing into the network is actually who he or she claims to be and so that the tools, codes, passwords, and protocols used to secure access to the network are not compromised. OKTA is the No. 1 identify provider.

The identity space has been categorized into Identity & Access Management, Identity Governance & Administration, Privileged Access Management–-and increasingly a fourth category called Customer Identity [CIAM]. The total addressable market for identity services is estimated at $80 billion annually. OKTA’s current revenue is less than $1 billion.

From the get-go OKTA has been cloud-based and cloud-delivered, which has allowed the company’s customers to address identify protection as more and more of company’s networks and applications are themselves cloud-based.

From fiscal 2015 to fiscal 2019 the company’s revenue grew at a 77% compounded annual rate. Year-over year growth in fiscal 2019 (which ended in January 2019) was 56%. The company is due to report quarterly earnings on September 1.

The shares are up only 4.22% in 2021 as of the close on August 27. OKTA’s market cap is $40.6 billion.

I will be adding the shares to my Millennial Portfolio and to my Jubak Picks Portfolio tomorrow. The shares closed at $264.98 on August 30. My Jubak Picks target price of $310 a share.