Why Okta (OKTA) Stock Is Trading Up Today

Jabin Bastian /
2023/08/14 10:58 am EDT

What Happened:

Shares of identity management software maker Okta (OKTA) jumped 5.06% in the morning session after the stock received a double upgrade from Goldman Sachs analyst Gabriela Borges who raised the rating from Sell to Buy and increased the price target from $77 to $91. The price target implied a potential 24% upside from where shares were traded before the upgrade. 

Borges emphasized the appealing risk-to-reward ratio and envisaged a possible resurgence in Okta's calculated remaining performance obligation ( cRPO - a leading indicator of revenue) and (annual recurring revenue) ARR, predicting a rise back to the 15%-20% range from its earlier 10-15% status. 

This anticipated progress is attributed to several factors, including "1) Okta anniversaries headwinds in its Customer IAM (Identity and Access Management) business tied to the merging of its organic and acquired product portfolios; 2) The Workforce segment stabilizes post go to market changes and a headwind from macro; 3) Okta ramps on cross-sell tied to new product cycles such as IGA (Identity Governance and Administration)and PAM (Privileged Access Management)." 

After the initial pop the shares cooled down to $73.82, up 3.37% from previous close.

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What is the market telling us:

Okta's shares are very volatile and over the last year have had 27 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 6.2% since the beginning of the year, but at $73.82 per share it is still trading 31.1% below its 52-week high of $107.11 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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