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September 01, 2020 1:43pm
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Okta, Inc. Stock Falls To Critical Level: What Happens Next?

OKTA sign on headquarters

Okta, Inc. (NASDAQ: OKTA) shares are down more than 5% following its Q1 results and have the market at a critical turning point aligning with prior resistance and current support targets. A move below this level could send the market back to its recent lows, a rebound back to the recent highs. The question is, what is the market more likely to do? The answer is to move lower. The results provided a beat-and-raise scenario that should support the market, but there is a problem. 

Demand for software services is tepid, and growth is slowing for this highly-valued name. Trading at 42 times this year’s earnings and 36 times next year’s, the valuation is a headwind the market may not be able to overcome soon. Stocks like Salesforce.com (NYSE: CRM), arguably better tech stocks that trade at lower valuations, have similar problems and are more likely to rebound than Okta.  Salesforce, at least, has dividends and share repurchases to sustain investor appetite, but Okta has neither. 

Okta Falls After Beat-and-Raise Quarter

Okta had a solid quarter with top-and-bottom-line results that were better than expected, leading to improved guidance. The issue is that growth is slowing and is projected to slow, with internals suggesting slowing will persist through the year’s end. The company reported $617 million in net revenue for a gain of 19.1% compared to last year. The growth outpaced the Marketbeat.com consensus estimate by $12.5 million or 200 basis points on strength in large customers. Customers contributing more than $100K in annual recurring revenue (ARR) grew by 12% to the top 4,500 and contributed to significant margin improvement.

Okta’s margin is strong and strengthening. The company reports a 1500-basis-point improvement in adjusted operating margin and an 1100-basis-point improvement in free cash flow margin. The free cash flow (FCF) margin hit 35% and set a record for the company but is expected to moderate as the year progresses. 

The problem with the results is the pace of growth, remaining performance obligations (RPO), and guidance. The pace of growth outperformed expectations but slightly, down more than 500 basis points YOY, and is expected to slow as the year progresses. The RPO, a leading growth indicator, fell to 15%, lagging the top-line advance, and is forecasted to slow again. The guidance was raised above the consensus but not enough to offset the slowdown in growth and weakness in RPO. RPO is expected to grow this year, but only by 13% to 14%, which is insufficient to warrant the high stock valuation. 

Analysts' Response is Mixed: Okta Indicated Higher

The analysts' response to Okta’s results is mixed, but the net results indicate higher prices. Several analysts lowered their price targets, offset by reiterated targets, one raised target and an upgrade. The consensus rating held steady at Hold, but the consensus price target increased because most new targets still lead the market. The caveat is that the consensus target implies only a 15% upside and may cap gains because it aligns with the high end of the current trading range. Okta can exceed that level, but it will take time for results to grow into the valuation. 

The technical outlook is mixed. The market has reason to move higher but isn’t and shows resistance at a critical level. The market is still above the critical support target at $90, in the middle of the trading range and point of past resistance, but it may cross below it soon. In this scenario, the market could fall to $60 quickly and align the valuation with current results. A rebound is unlikely from this level without a bullish catalyst, and there are no visible catalysts until the next earnings report. 

OKTA stock chart

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