What Happened:
Shares of identity management software maker Okta (OKTA) fell 5.18% in the mid-day session after the broader market weakened following Fitch's announcement that it cut the U.S. long-term foreign currency issuer default rating to AA+ from AAA, citing “expected fiscal deterioration over the next three years,” an erosion of governance in light of “repeated debt-limit political standoffs” and a generally growing debt burden.
After a strong year-to-date performance for the market and for the tech sector specifically, many investors are probably re-assessing the economic backdrop and taking profits. On the other hand, earnings season is more than halfway done and well over half of companies have reported better-than-expected results when compared to Wall Street analysts' Consensus estimates. This gives ammo to the bulls, who argue that the economy is on firm footing.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Okta? Access our full analysis report here, it's free.
What is the market telling us:
Okta's shares are very volatile and over the last year have had 28 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. The previous big move was two months ago, when the stock dropped 14% on the news that 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 since this 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.
Okta is up 4.34% since the beginning of the year, but at $72.56 per share it is still trading 32.3% 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 $1,330.
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