These Two Out-of-Favor Stocks Are a Buy Right Now

Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.

One of the most notable effects of the coronavirus pandemic has been how it has affected work life in America.

Remote working has now become commonplace. The numbers speak for themselves: Since the start of the pandemic, it is estimated that the number of Americans who work from home regularly has risen from just 4% to 44%.

The pandemic though did not start this phenomenon; it merely accelerated it.

With the availability of faster broadband speeds, working from home became a viable alternative for workers in many white-collar professions, even before the pandemic. Globally, this began in 2005. According to a research report from Global Workplace Analytics, the number of Americans working remotely had already risen by 173% even before the pandemic started. The same report estimated up to 62% of Americans could feasibly work from home.

That is great news for companies involved with cloud computing technologies.

Companies in the services end of the cloud computing market, for example, are enjoying business that can be conservatively described as brisk.

Yet, these stocks are out-of-favor on Wall Street, as the short-term-focused traders sell off anything related to remote working. All work from home (WFH)-related stocks have been under heavy selling pressure so far in 2021.

The situation interests a contrarian investor like me, so let’s look at two companies in the WFH space.

Okta and Workday

The first company is Okta (OKTA), which provides a platform of cloud-stored apps to its clients. The clients’ employees can use the Okta apps across a wide range of devices to allow them to work entirely remotely.

Okta has upended the identity protection sector by being solely cloud-based, allowing security teams to protect identities as more cloud-delivered resources and applications are used. A critical part of Okta’s offering is its Okta Identity Cloud, which provides customers with a centralized way to enforce assorted parts of identity access and user security tasks.

Okta has delivered even better results than expected, fueled by the pandemic causing a corporate mindset shift in approaches to security. Recent widespread breaches by hackers, starting with SolarWinds, has heightened the demand for the best-of-breed security tools that Okta has.

Employees working from home have been the driving force behind businesses adopting zero-trust security architectures as employees are outside of a secure office environment.

This trend has led to companies the companies that are increasingly relying on identity and access management for security protection directly to Okta—and the company is benefitting greatly. Okta’s last earnings report was spectacular, showing year-over-year revenue growth of 40% fueled by a 42% uptick in subscriptions.

Businesses adopting cloud resources and hybrid networks are finding value in Okta’s solutions due to its 7,000+ prebuilt application and infrastructure integrations. For instance, Okta’s technology has a function that immediately terminates access to the service the second an employee leaves a company.

Okta’s customer count grew by 26% year over year, to 10,000. Customers with annualized contract values over $100,000 increased by 33% year over year, to 1,950.

Not long ago, Okta announced it would buy Auth0 for $6.5 billion in an all-stock deal. Auth0 is solely focused on customer identity and developers, which fits perfectly with Okta’s expansion into customer identity (25% of revenue in the latest quarter). While the price may seem high, the long-term potential of these two rapidly growing companies working as one could dominate the customer identity market.

Okta expects that the combined company can grow revenue at least 35% annually through fiscal 2024. But that may be too conservative. Companies and governments will funnel a lot of spending toward cloud-delivered identity access management to enforce security consistency in a world without a security perimeter.

Workday (WDAY) is a similar subscription-based cloud computing service to Okta; however, it has more specific applications. Workday provides a suite of apps that are focused on the finance, human resources, and analytics side of businesses. In other words, the nuts and bolts necessary to run a business.

The company, like Okta, also reported great numbers in its latest quarter, exceeding expectations.

Workday experienced broad-based strength as companies accelerated their transformation to digital. The platform continues to be in a league of its own, thanks to its cloud-only and cloud-first human capital management software.

Numbers from the company’s latest quarter showed revenues rose by 15% year over year, to $1.18 billion. Subscription revenue was $1.03 billion, growing 17% year over year due to both new business sales as well as many customer renewals.

Growth at Workday has just begun, with a huge opportunity to take more market share from legacy providers like SAP and Oracle.

Investment Implications

The share prices of both Okta and Workday have retreated recently, in line with the general sell-off in technology shares.

But there is one fundamental reason they should still attract interest from investors: the recent shutdown of the Colonial Pipeline and the ransom payment demanded to reopen it highlighted the risks that companies now face. There is a great need to effectively manage a more dispersed, connected, and potentially cyber-insecure workforce.

I give Okta a 5-star rating and Workday a 4-star rating. You can buy both stocks at a price of up to $250 a share.

— Tony Daltorio

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Source: Growth Stock Advisor