OKTA with Nobias Technology: Case study of Okta Inc. Sell-off
The cybersecurity industry continues to experience stellar growth.
However, OKTA shares have suffered on a year-to-date basis, down more than 33%.
OKTA's top-line is expected to grow rapidly in fiscal 2023; however, the company's losses are expanding.
But, Wall Street analysts remain optimistic on these beaten down shares, with average price targets calling for strong double digit upside
Cybersecurity firms have experienced tremendous growth in recent years and many analysts believe that this trend has secular tailwinds. Overall, the Global X Cybersecurity ETF (BUG) has generated relatively flat returns on a year-to-date basis. Yet, throughout 2022, many of the rapidly growing cybersecurity with somewhat speculative valuations attached have suffered. Okta, Inc, a cybersecurity firm with a market cap of $23.91 billion, has seen the value of its shares decline by 33.29% this year. Okta reported fourth quarter earnings one month ago and since then, the stock’s sell-off has accelerated, with shares falling more than 12%. However, in the face of this share price weakness, the credible authors and analysts that Nobias tracks have expressed strong bullish sentiment towards the beaten down OKTA shares.
Reinhardt Krause, a Nobias 5-star rated author, wrote an article at Investors.com on 3/3/2022 highlighting OKTA’s recent earnings report. Regarding Okta’s business model, Krause wrote, “Okta's cybersecurity software monitors and manages privileged accounts. Hackers often target employees or management with administrative access to company computer systems.”
Moving onto the company’s fourth quarter results, he said, “Okta stock fell Thursday as fiscal 2023 profit guidance came in well below expectations despite the company reporting a narrower-than-expected loss for its January quarter.” He touched upon the results, saying, “San Francisco-based Okta said it lost 18 cents per share vs. a 6-cent profit in the year-earlier period. Revenue climbed 63% to $383 million, including $56 million from Auth0, the company said.”
OKTA March 2022
With regard to fiscal 2023 guidance, Krause said, “For the current, full-year fiscal 2023 which ends next January, Okta predicted a loss in a range of $1.24 to $1.27 per share. Analysts had projected a 49-cent loss.” While the bottom-line guidance was disappointing, Krause did point out that Okta is still falling for strong revenue growth. He said, “The company projected revenue of $1.785 billion, up 38%. Analysts predicted $1.75 billion.”
However, it appears that the market has been more focused on the prospect of expanding losses as opposed to the strong top-line growth because since Okta reported results on 3/3/2022, shares are down roughly 12.6%. These widening losses are largely due to rising capex related to an increasing headcount at this rapidly growing company.
Joe Williams, a Nobias 5-star rated author, published an article at Yahoo Finance on March 3rd highlighting what Okta’s CEO, Todd McKinnon, described as an “awkward adolescent” stage of growth, related to management turnover and the upcoming hiring push.
Williams highlighted double digit turnover in recent years at OKTA (11% in 2019, 19% in 2020, and 20% in 2021), saying that this has been a somewhat typical occurrence in Silicon Valley throughout the pandemic, but noting, “at Okta, founded in 2009, the turnover also hit at something deeper: The company is trying to jump from $1 billion in annual revenue to a goal of $5 billion.”
Regarding upper level management changes, Williams said, “A cadre of long-time executives have left, including former finance head Bill Losch and worldwide head of operations Charles Race. Okta has largely looked outside its workforce for replacements. Former Splunk Inc. president Susan St. Ledger was hired to take over for Race and fulfill the mission to get to reach the new sales target. And after 10 years at Okta, technology head Hector Aguilar left and former Alphabet Inc. executive Sagnik Nandy took his spot.” He quoted McKinnon, who touched upon the hiring issues that the company has had in recent years during the Q4 reporting season, saying, “We just didn’t have the experience. You can either bet on someone that hasn’t done it before or you can try to find someone amazing.”
It’s believed that these exits has slowed growth and negatively impacted the integration of recent M&A that Okta has pursued; however, Williams provided some bullish insight, saying, “The impact of the exits may be a short-term blimp: Okta is planning to hire more employees this year as it expands the sales force and amps up investments in marketing. Spending in that area rose 92% to $221 million in the period ended Jan. 31, Okta said Wednesday in its statement of quarterly results.”
Once again, the uncertainty associated with talent and ongoing turnover at Okta has hurt the sentiment surrounding shares in the market; however, as Steven Smith, a Nobias 5-star rated author, noted in a recent report, Wall Street analysts are still largely bullish on OKTA shares. In the article that Smith published a report at Modern Readers, he highlighted a series of recent analyst updates on OKTA shares in light of this Q4 report. His points include:
Raymond James lowered their target price on shares of Okta from $310.00 to $260.00 and set a “strong-buy” rating on the stock in a research note on Thursday, March 3rd.
Deutsche Bank Aktiengesellschaft reduced their target price on Okta from $250.00 to $195.00 and set a “buy” rating on the stock in a research note on Thursday, March 3rd.
DA Davidson dropped their price target on Okta from $250.00 to $225.00 in a research note on Thursday, March 3rd.
Overall, Smith said, “Six investment analysts have rated the stock with a hold rating, twenty-two have assigned a buy rating and one has given a strong buy rating to the company. Based on data from MarketBeat, the stock has a consensus rating of “Buy” and a consensus target price of $247.81.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Smith also went on to highlight recent insider sales that he saw related to Okta. He wrote, ‘CFO Brett Tighe sold 2,858 shares of Okta stock in a transaction on Wednesday, March 16th. The stock was sold at an average price of $152.92, for a total transaction of $437,045.36. The sale was disclosed in a legal filing with the Securities & Exchange Commission, accessible through here. Also, General Counsel Jonathan T. Runyan sold 2,010 shares of the business’s stock in a transaction on Wednesday, March 16th. The stock was sold at an average price of $152.92, for a total value of $307,369.20. The disclosure for this sale can be found here.” Overall, he said, “Over the last three months, insiders have sold 19,437 shares of company stock valued at $2,972,306. 9.60% of the stock is currently owned by corporate insiders.”
Although insiders have been selling, the data collected by the Nobias algorithm shows that both credible authors and analysts (only those with Nobias 4 and 5-star ratings) remain largely bullish on OKTA shares. 81% of the articles published by credible authors focused on OKTA shares recently have included a “Bullish” bias. And, looking at the price targets that the credible Wall Street analysts that we track have placed on OKTA shares, we see an average price target of $228.45. This is slightly lower than the consensus target that Smith mentioned above; however, it’s still well above OKTA’s current share price of $148.12. Relative to the current share price, the average price target applied to shares by the credible analysts that Nobias tracks represents upside potential of 54.2%.
Disclosure: Nicholas Ward has no OKTA position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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