Middleware is Back.

Software infrastructure is the gift that keeps on giving. It’s arcane to most investors because unless you develop software it’s hard to understand. The term “middleware” is often used because it sits behind applications and services that users see. Software “middleware” is critical but invisible.

Recently we’ve had successful IPO debuts fro companies in the space including MuleSoft (NYSE: MULE), Talend (NASDAQ: TLND) and Twilio (NYSE: TWLO).  (Last year Apigee (NASDAQ: APIC) was acquired by Google after being one of the first companies to tap the IPO market for software infrastructure.) We’ve also seen Cloudera (NYSE: CLDR) file for their IPO and Yext (NYSE: YEXT) is on deck for next week. For more on these see the: (MULE Slides, MULE Transcript, TWLO Slides, TWLO Transcript, YEXT Slides, YEXT Transcript.)

Okta (NYSE: OKTA) is set to price today to trade tomorrow and it’s another core software infrastructure name. Revenues have been growing at 80% to $160M in the year just ended. The underwriters are led by Goldman Sachs and the price range has just been revised up to $15-17. At the $16 mid-point the market cap will be about $1.4B or just over 9x trailing sales.

Our IV for OKTA looks much higher and we see the shares in the $30-40 range.

What’s so useful about OKTA?

The roadshow itself is one of the most mind-numbing we’ve seen in a while. It’s filled with terms like single sign on, multi-factor authentication, API access management, universal directory – all delivered in a monotonous tone without many pictures. We’ve done our best to capture the OKTA IPO slides but would refer you to the OKTA IPO roadshow transcript if you want to really understand it.

As shown in the pictures below what’s special about OKTA is that it solves a difficult set of problems *across multiple technologies* and both inside and outside the enterprise – AKA “hybrid cloud.”

It’s not just a question of being able to work across different vendors on-premise or in the cloud. Because OKTA specializes in this area and has thousands of pre-built integrations it’s more versatile, easier to do and bring greater security to the whole process. For example even in an all Microsoft environment for Office 365 the OKTA solution offers advantages.

We’ve done a quick IV analysis for OKTA and even with the increased price range the shares look undervalued.

What are the risks?

You’ve got to be good in middleware. That’s because every application and user depends on it working. When there is a problem the impact is broad. Remember when Amazon AWS went down for a while? And when DNS provider DYN went down for a day hardly anyone on the East Coast of the US could access the internet. (Oracle still bought DYN after the outage.) So far Okta has executed very well and their development process and infrastructure is superior to their competition.

More concerning perhaps is that there are only so many customers for an offering as sophisticated as what Okta provides. Everyone needs secure identity management but the number of companies willing to pay for it is limited. Investor views of the TAM may ebb and flow which could create more volatility for the stock.

As one of our favorite sales professionals has said “when these middleware stocks go up everyone thinks they know what the companies do, when they go down nobody seems to know what they do.” It can be hard to find “strong hands” for some of these stocks.

With the resurgence in the middleware stocks we’ll start publishing our monthly analsyis and performance of the group with different benchmarks and relative valuation figures.

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