As companies get larger, growth rates tend to slow, even for high-growth tech stocks. It's what investors call the law of large numbers. For example, when a company grows $50 million over the course of a year on a base of $100 million, it's a 50% year-over-year growth rate. But if it grows another $50 million in the following year, it's only a 33% growth rate. On a Motley Fool Live episode recorded on June 16, Fool.com contributors Brian Stoffel and Brian Withers discuss Okta's (OKTA 7.67%) slowing growth and provide some perspective for investors on this identity-management specialist.
Brian Stoffel: Brian, I am an Okta shareholder as well, just like DocuSign, but I will admit that recently I've been of all the companies, this is one where I'm like, maybe I need to reevaluate. I started with, look, I understand what Okta does. I don't understand the technology behind it because I don't have a degree in computer programming or engineering, but I was watching the rank and I saw a lot of people who do understand about these things and Okta ended up going pretty low as this is a show that Anand [Chokkavelu] does.
Here's the gist that I get. If you look at the growth rates, they look pretty good on the surface, but a bunch of the implied growth rate. Moving forward is a lot of that is going to come from Auth0. I know that the companies can't grow forever, but is it possible that the acquisition can be a good thing. Because it seems like it would be a good thing for the company and customers, but it still might be hiding the slowing growth rates that Okta has as a whole. Also, acquisitions are hard. What do you think?
Brian Withers: Yeah, there's a lot to unpack there. I think it's a really good question that you're asking. Investors, from a buy and hold perspective, it isn't buy hold and forget about it, it's a buy hold and check, check, check, check, check. And I think that's what you're doing and that's absolutely appropriate.
When you say companies can't grow forever, I would rephrase a little bit to say, companies can't grow at a 40 percent plus rate forever. Let's go to the videotape or the slides anyway. [laughs] That's a throwback from ESPN days. Looking at Okta, the growth rate has slowed and this is the quarterly year-over-year growth rates and it's been on a steady decline so there's no hiding in that. Over time, as companies grow larger, it's likely that this is going to happen a little bit, but here's what's interesting that I think is excited about Okta going forward.
These two businesses, the workforce identity which was their original business, and then their customer identity business, these have actually grown a bit from when they initially come out. This customer identity used to be about 25 billion, now it's about 30 billion and then they added this IGA and PAM. What's IGA and PAM, you asked? It's identity-related and privilege access management tools to add to the suite that Okta brings, and it's adding new products which are bringing new opportunity for new markets.
They've grown their addressable market over the last several years through just understanding of the market and the market's growth plus new products. Here's where I think investors really need to understand. On the left side in these blue boxes is what Okta expects on our organic revenue growth. CAGR is compound annual growth rate through 2024. They expect a 30-35 percent growth rate. That's lower than historical growth rate as we saw in the first slide.
But over here on the right, Okta brings that up to greater than the 35 percent growth rate [with the Auth0 acquisition] and to me, a company that's growing 30 percent organically and can tack on some acquisition growth on top of that, that's a company that I'm excited to keep around on my portfolio for a long time.
Brian Stoffel: All right. Ok. I'm going to hold, but I am going to go back and check because it is one of those things, but I appreciate seeing that.
