Okta Stock Suffered A Bear Market
Okta, Inc. (NASDAQ:OKTA) investors are approaching its highly-anticipated earnings scorecard next week. Okta's fiscal first-quarter earnings release will be delivered on May 29, even as OKTA stock has yet to recover its post-earnings highs after Okta's earnings release for the previous fiscal quarter. As a reminder, OKTA suffered a steep pullback of more than 20% from its early March 2024 highs, dropping into a bear market through OKTA's recent April lows. Therefore, I assess Okta investors as heading into the company's upcoming earnings scorecard with more uncertainty. I last updated Okta investors some time ago, in 2022. While OKTA went through a significant growth normalization phase, which led to further downside, my bullish view of OKTA has remained consistent.
Notwithstanding the near-term caution, I must remind Okta investors that I have gleaned an increasingly robust bottom above the $90 level at OKTA stock's April lows. Consequently, the recent improvement in buying sentiments across the cybersecurity space should bolster investor confidence in OKTA.
Okta's upcoming earnings release will be monitored for potential signs of cybersecurity "spending fatigue," as Palo Alto Networks (PANW) promulgated in February. In addition, PANW's recent earnings release unveiled billings concerns attributed to deferred payments from its customer base. However, PANW stock has recovered its initial post-earnings losses, highlighting that buying enthusiasm has remained resilient in leading cybersecurity plays.
Okta Needs To Expand Its Enterprise Customer Base
As a result, I'm confident that Okta's cautious FY2025 guidance and its demonstrated profitability in FY2024 should underpin investor confidence in its business model. As a reminder, Okta is a leading independent identity and access management provider.
Okta competes against Microsoft (MSFT) primarily in a market with an assessed TAM worth $80B. Taking on the software behemoth was an uphill challenge when Okta was unprofitable previously. Despite that, Okta believes it has demonstrated its value proposition against Microsoft. However, Microsoft's software bundling advantages could remain a critical impediment to a faster adoption of Okta's solutions. However, Okta's multi-cloud compatibility should appeal to enterprise and commercial customers keen on avoiding vendor lock-in to Microsoft in the long run. Okta's solutions can also be integrated seamlessly with other modules in its end-to-end platform, bolstering its overall value proposition for its customers.
Furthermore, the proliferation of AI has bolstered the criticality of top-level identity and access management solutions. Okta has also won more deals from larger customers, as "transactions worth $1M or more grew by 30%" in FQ4. Therefore, I urge investors to pay close attention to Okta's upcoming commentary about its enterprise growth cadence, which could help Okta outperform its relatively cautious guidance articulated in FQ4.
As a reminder, Okta anticipates revenue growth of between 10% and 11% for FY25, down significantly from FY2024's 21.8% increase. Notwithstanding management's caution, OKTA surged initially after its FQ4 earnings, as investors likely expected worse. Okta's cRPO guidance of 13% growth for FQ1 implies a further slowdown from FQ4's 16% increase. Okta highlighted increased macro uncertainties and caution attributed to the potential impact of its security incident in 2023 as critical factors affecting its prudence. As a result, I believe Okta has likely sandbagged its outlook heading into FY2025, constructively helping OKTA stock outperform based on more robust execution.
Wall Street analysts have also baked in better performance, as they penciled in FY2025 revenue growth estimates of 10.8%, at the higher end of Okta's outlook. Analysts have upgraded Okta's forward estimates, underscoring their confidence in Okta's ability to reignite growth.
OKTA Stock Isn't Expensive
OKTA stock is assigned a "C" valuation grade relative to its tech sector peers. Looking closer at OKTA's forward adjusted PEG ratio of 1.54 suggests a nearly 25% discount against its sector median. Therefore, OKTA isn't valued aggressively, suggesting the market has reflected significant uncertainties.
Furthermore, Okta's improved profitability grade ("A-" grade) should attract growth-at-a-good-price investors looking to exploit its sustainable recovery thesis. OKTA's momentum has also remained solid ("B+" grade), providing corroborative insights into its buying resilience.
Is OKTA Stock A Buy, Sell, Or Hold?
OKTA's price action has remained robust, even though it suffered a bear market pullback from its March highs. The $110 resistance zone has proved to be a zone that attracted more intense selling pressure since August 2022. As a result, investors should consider avoiding adding exposure close to that level until OKTA's buyers can demonstrate buying momentum to break through that level decisively.
Notwithstanding my caution, OKTA's uptrend continuation thesis is intact. Buyers have continued to buy OKTA's dips with conviction since its bottom in November 2022. Consequently, it has helped OKTA form pivotal higher-lows and higher-highs over the past two years, corroborating OKTA's uptrend bias.
With OKTA already being lifted above its $90 support level, OKTA looks well-positioned heading into its upcoming release. Therefore, investors who have yet to add exposure to the leading identity and access management player should consider doing so if they anticipate a better-than-expected release.
Rating: Upgrade to Strong Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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