Once again, the earnings calendar is packed with many tech companies that ETR tracks in our quarterly Technology Spending Intentions Survey (TSIS) reporting next week, such as Snowflake, Okta, Elastic, Zscaler, and others. In advance of the earnings reports, ETR has compiled some recent data on a handful of those companies for this article but remember that the full data sets and reports are always available on the ETR platform. Let's get started with a data review on Okta.
Okta | ETR Data Outlook: Positive | Earnings Date: 3/1/2023. For transparency and context, ETR held a Positive long-term outlook on Okta’s data set through the APR22 TSIS survey before moving to a Neutral view on the data in the following surveys due to declines in Net Score and Adoption rates in tandem with stalling Pervasion rates. In the most recent January 2023 survey period, much of that concern has been alleviated; let’s take a closer look.
The aggregate Net Score across all respondents for Okta and Auth0 sits at 47%. While that is 12% lower than the updated 1H22 data captured last year, it represents a 19.5% rebound survey-over-survey (s/s) and is more than double the sector average. Okta and Auth0 combine for a Positive vs. Negative spend ratio of 54:6, materially improved from prior survey levels of 47:8 due to more Adoption and Increase indications and less negative spend intent. Regarding vendor positioning, the dynamic identity access duo is dominant. Among a selection of IAM vendors, the top two vendors in both Net Score and Pervasion are Okta and Auth0. In fact, across the entire Information Security sector (among vendors with at least 50 citations), Auth0 sits in the 2nd highest position, and Okta sits in the 7th position. (see data illustration below)
In sum, while the step down in 2022 was prudent, the recent survey shows a sharp rebound in Positive spend intent in tandem with a dominant competitive position for Okta/Auth0, warranting a Positive outlook on the identity and access management duo’s data set once again. With high-profile headlines of multiple security breaches and massive volatility in share price ranging from highs of nearly $300 to lows in the mid-$40s, Okta has certainly been living through interesting times. However, based on ETR's data, the IT decision makers have decidedly cast their spending intentions votes in favor of the clear leader in identity and access management.
Snowflake | ETR Data Outlook: Positive | Earnings Date: 3/1/2023. Snowflake’s overall Net Score is down yet again in the January 2023 survey, but we maintain a Positive outlook on the vendor's data set because its lofty Net Score puts it in the top echelon of vendors across the entire survey. Indeed, its 59% Net Score ranks as the 3rd highest citation weighted Net Score in the entire TSIS vendor universe. Customers also praise the vendor’s product technical capabilities as the primary reason they adopt Snowflake, and IT decision makers tell us in ETR Insights interviews how central Snowflake has become to their data and analytics strategies.
After reviewing the most recent data set, the ETR research team wrote, "While Snowflake has seen consistent declines in Net Score since January 2022, largely as Increase spend indications turn to Flat indications, its 59% Net Score still puts it in rarified air, the third-highest Net Score in the entire TSIS vendor universe. Microsoft is showing the most competitive pressure on Snowflake in a shared accounts analysis of the Database / Data Warehousing sector, but Snowflake remains in comfortable positioning relative to sector peers. For its continued impressive spending intentions, we remain Positive on Snowflake's most recent data set."
In the data illustration below, Snowflake holds the highest Net Score ranking among all peers in the Database / Datawarehousing sector, above Microsoft and AWS; although the two cloud giants boast a much higher Pervasion rate among our survey population. Still, Snowflake's Pervasion ranks fourth among all sectors peers (with at least 50 citations), trailing only Microsoft, AWS, and Oracle.
Shares of Snowflake hit highs above $380 on two separate occasions in November of 2021 and 2022 based on the excellent underlying functionality of the product, hyper-growth expectations, a stellar management team with deep pockets, and institutional investors that either never read Graham & Dodd or chose to forget their teachings. Since then, two things still remain, Snowflake has an amazing product that is consistently praised by ETR's ITDM community and the all-star management team remains intact. Growth expectations have also been reset; however, I am not sure G&D would yet approve of a 15x forward sales multiple.
Elastic | ETR Data Outlook: Neutral | Earnings Date: 3/2/2023. Following two vendors with positive data sets, we review a data set that showed enough deceleration to warrant a step down from a positive to a neutral viewpoint. During the most recent TSIS survey period, the ETR Research team wrote, "On an aggregate basis across both sectors we track the vendor, Elastic’s Net Score has fallen year-over-year (y/y ) and survey-over-survey (s/s), marking the 4th consecutive decline. The current Net Score sits at 35.8%, a 31.8% drop since JAN22 levels. The falling Net Score is driven by declines in Adoption and Increase indications combined with more negative spend intent, including a sizeable jump in Replacements."
For Elastic, the January 2023 data set unfolded as a tale of two sectors, with Analytics being relatively stable and Information Security weakening. In the past, Elastic’s absolute positioning within its closest Observability peer group was enough to offset other areas of weakness. However, we have seen the vendor’s position slip during this survey period. While still firmly positioned in the broader Analytics sector, Elastic now trails Datadog and Grafana in Net Score amongst its Observability peers. In addition, Elastic now sits in 3rd place among its closest Observability comps within the Information Security sector, dropping from the #1 position last survey. We also note that both Datadog and Splunk captured survey-over-survey rebounds in Net Score within Information Security, contrasting the further sequential declines for Elastic in that sector.
Revisiting the October 2022 TSIS data report, ETR wrote: “Strong market positioning versus peers and growth within Information Security Net Score offset concerns of broader declining spending, resulting in a continued positive outlook.” In this most recent data set, those trends have reversed. As such, the longer-term declines in aggregate Net Score (especially among Global 2000 organizations), growing Replacement rates, and weakening competitive positioning within a crowded Observability market warrant a step down to Neutral on Elastic’s data set heading into 2023.
From an equity perspective, shares of Elastic have seen peaks close to $200 and lows below $50 over the last 14 months while ending its trademark infringement lawsuit with cloud "bully" AWS. As of press time, Elastic shares are settled in at $60, which equates to a valuation of 4.5x forward sales and a ~2.0% free cash flow yield for low 20% revenue growth. With declining spending intentions data amidst a very crowded Observability sector that multiple end users have called "a race to the bottom," this group of Observability peers will be an area worth watching closely throughout the year.
Zscaler | ETR Data Outlook: Positive | Earnings Date: 3/2/2023. Lastly, we quickly check in on a security vendor that ETR has been tracking since their pre-IPO days, and one that continues to impress. In our most recent data set, the ETR Research team wrote, "While we will keep an eye on this trend of ‘flattening’ spend for Zscaler, the same could be said for many vendors in the Information Security sector during this survey period. This fact, combined with low overall churn, overall high Net Scores, and continued citation growth in large enterprise accounts, keeps us Positive on the vendor’s data set entering 2023." Zscaler’s Pervasion rate in our most recent survey was a significant area of strength compared to prior-year levels across most subsamples, particularly Global 2000, Financials/Insurance, and IT/Telco organizations. Customer growth among Global 2000 accounts shows no signs of slowing.
Paying a 10x forward sales multiple for expected 40% revenue growth might not be an easy decision for everyone, but based on the end users spending intentions data, Zscaler still exhibits a firm share of large enterprise budgets.
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Enterprise Technology Research (ETR) is a technology market research firm that leverages proprietary data from our targeted IT decision maker (ITDM) community to provide actionable insights about spending intentions and industry trends. Since 2010, we have worked diligently at achieving one goal: eliminating the need for opinions in enterprise research, which are often formed from incomplete, biased, and statistically insignificant data. Our community of ITDMs represents $1+ trillion in annual IT spend and is positioned to provide best-in-class customer/evaluator perspectives. ETR’s proprietary data and insights from this community empower institutional investors, technology companies, and ITDMs to navigate the complex enterprise technology landscape amid an expanding marketplace. Discover what ETR can do for you at www.etr.ai