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Okta, Inc: When Great Results Aren’t Good Enough

Okta stock price forecast

Okta, Inc (NASDAQ: OKTA) reported a blow-out quarter that should have the stock moving higher. Instead, the market is moving lower because of 2 analysts' downgrades, which may start a new trend. As good as the Q1 results and outlook are, they include 1 thing that will keep this market capped for the foreseeable future: slowing growth. With a valuation of 120X last year’s earnings, 100X this year’s, and 75X next’s, no amount of growth can keep this stock moving higher with growth slowing. What this means for investors is a period of consolidation. The stock is in a trading range and will most likely remain range bound until the revenue and earnings catch up with what the market has priced in. 

Who downgraded Okta, Inc, and why? The first is from JP Morgan Chase & Co. That firm did a double-downgrade from Overweight to Neutral, citing macro-economic growth pressures and valuation with the expectation the growth pressure will increase before it subsides. The 2nd came from BMO, which cut the rating to Market Perform from Outperform, citing the same factors adding there is limited upside potential due to the price multiple. 

This means a cap on the stock price for the analyst community. The analysts had been increasing their price targets recently, but that is over. The consensus price target is below the pre-release action and heading lower now that the downgrades have begun. The post-release action has the market below the consensus, which suggests the bottom may be near, but there is still a significant amount of room for the stock to fall. 

Okta: Stumbles Into A Buying Opportunity 

Okta shares are down 20% in post-release, premarket trading due to the downgrades, not the results. The results have revenue at $518 million or up nearly 25% YOY. This is 150 basis points above the consensus and driven by a 26% increase in subscription revenue. The margin news is equally good, with the GAAP losses narrowing nearly 50% and the adjusted profit reversing a loss in the prior year. That left the adjusted earnings at $0.22, up from -$-0.27 last year and a dime ahead of the consensus. 

The guidance is also favorable to investors, if not higher share prices. The company raised its range for Q2 and FY revenue and earnings to a range that is above expectations. However, among the factors that led to the downgrades are signs of slowing growth. The company’s RPO or subscription backlog is up only 9% compared to the 26% subscription growth and 24.8% top-line growth, while the cRPO or RPO expected to be recognized this year is up only 20%. Those are still good metrics and have the company on track to grow into its valuation, but they are not enough to lead the market higher. 

Institutions Are A Headwind For Okta 

The institutions bought on balance in 2023, but the activity is muted compared to 2022 when they sold in large quantities. They may help support the market at the bottom of the trading range but should be expected to propel the stock higher, and they may provide resistance at the top of the trading range. 

The chart is consistent with range-bound trading. The post-release action confirms resistance at the range top, consistent with previous support levels. The next target is near recent lows at $68. If those don’t hold, the stock is heading toward the bottom of the range near the $50 level. 

Okta stock price chart

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