Shares of identity management software maker Okta (OKTA) fell 14% in the after-market session after the company reported first quarter results that exceeded analysts' revenue, subscription revenue, adjusted operating profit, free cash flow, and earnings per share (EPS) expectations. Margin improved significantly. Additionally revenue guidance for the next quarter and full year also came in ahead of Consensus. Operating income guidance for the next quarter and full year were roughly inline. The key negative was that cRPO (current remaining performance obligations) guidance for the next quarter was below, and since this is a leading indicator of revenue, it seemed to drive the narrative and stock action. Additionally, management acknowledged the existence of macro challenges, particularly in new business acquisition across both small and medium-sized businesses (SMB) and enterprise segments. The company reported a shift in customer preferences, with requests for shorter contract terms and a greater emphasis on upsells rather than new business, resulting in smaller average deal sizes. Following the results, J.P. Morgan analysts downgraded the stock's rating from Overweight (Buy) to Neutral (Hold) and lowered the price target from $95 to $85. The analysts attributed the downgrade to macroeconomic pressures impacting the company's growth prospects. Similarly, BMO Capital analysts downgraded the stock's rating from Outperform (Buy) to Market Perform (Hold) and lowered the price target from $94 to $85.
What is the market telling us:
Okta's shares are very volatile and over the last year have had 40 moves greater than 5%. But moves this big are very rare even for Okta and that is indicating to us that this news had a significant impact on the market's perception of the business. The previous big move was 24 days ago, when the company gained 5.8% on the news that competitor, Zscaler, pre-announced an impressive "beat and raise" quarter. Preliminary third-quarter results exceeded analysts' revenue, and operating income estimates. In addition, management raised full-year guidance for revenue, calculated billings, and operating income. Founder and CEO, Jay Chaudhry, added to the optimism, stating that "the high ROI of adopting the Zscaler Zero Trust Exchange platform continues to resonate with customers and prospects in this challenging macro environment." It was a mixed start to the earnings season for cybersecurity stocks, with Tenable, Cloudflare, and Check Point Software all reporting disappointing results. However, the company's impressive announcement means that either the subsector may not be as challenged as feared, that there is company-specific outperformance from Zscaler or some combination of both.
Okta is up 2.53% since the beginning of the year, but at $71.38 per share it is still trading 33.4% below its 52-week high of $107.22 from August 2022. Investors who bought $1,000 worth of Okta's shares 5 years ago would now be looking at an investment worth $1,240.
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