What Happened:
Shares of identity management software maker Okta (OKTA) fell 9.7% in the afternoon session after the company reported first-quarter earnings and provided calculated remaining performance obligations (cRPO - leading revenue indicator) for the next quarter, which fell below Wall Street's expectations. The Q2'24 cRPO guidance implied 10-11% year-on-year growth, below consensus expectation of 12% y/y. Also, net new logos remained weak at 150, and net new >$100K customers fell sharply to 65, compared to 120+ customers added in the past several quarters.
On the other hand, Okta beat analysts' revenue, RPO, and EPS estimates during the quarter. Its full-year revenue, operating income, EPS, and free cash flow guidance topped analysts' expectations. The company also provided an encouraging update on the security incident in October 2023, adding that while difficult to quantify, its analysis suggests minimal financial impact. Overall, it was a mixed quarter, with the market likely struggling to digest some of the weaknesses that surfaced in the result, as well as the weak growth outlook.
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 12 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 biggest move we wrote about over the last year was 3 months ago, when the stock gained 27.7% on the news that the company reported an impressive "beat and raised quarter." Fourth quarter results outperformed Wall Street's revenue estimates, alongside strong free cash flow. Okta also provided optimistic revenue guidance for the next quarter, which exceeded analysts' expectations. Also, the company slightly raised its FY'25 outlook and now expects revenue growth of 10% to 11%, a non-GAAP operating margin of 18% to 19%, and a free cash flow margin of approximately 21%. Management highlighted the conservatism baked into the guidance given the "stable but still challenging macro environment."
Moving on, the outperformance suggests that the recent security incident, which was reported in October 2023 and affected some of the company's products, had minimal impact on its financial position, reassuring investors. Also, the company is focused on optimizing its cost structure following the recent layoff, which affected 400 positions. Going forward, Okta is focused on growing its headcount in lower-cost regions such as India and Poland. Overall, this was a strong quarter for the company, providing more reasons for investors to stay positive.
Okta is up 4.1% since the beginning of the year, but at $90.46 per share it is still trading 18.9% below its 52-week high of $111.49 from March 2024. Investors who bought $1,000 worth of Okta's shares 5 years ago would now be looking at an investment worth $849.53.
Today’s young investors won’t have read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.