Okta: Good Company, Bad Margins
The institutions are shedding Okta (NASDAQ:OKTA) and we think you should too. The institutional activity was moderate in the 2nd half of 2021, but picked up noticeably in Q1 and not for the better. Net selling is worth about $3.5 billion, or roughly 12.35% of the market cap with shares trading at their new low. Based on the earnings results, we don’t think the selling is over.
Shares of Okta plunged more than 10% in the wake of the Q4 earnings release and we’d like to say they are near a bottom. While price action may show some signs of bottoming in the near term, we think they are heading much lower.
The key takeaways from the report are that revenue is still growing at a high double-digit pace and that margins are shrinking even faster. There were few details in the report about why margins shrank so much, but the underlying cause is a doubling of costs versus last year.
Surely some of the cost is due to growth and growth efforts—the company is a hyper-growth story that may accelerate next year—but a doubling of costs is not something the market was looking for.
Hyper-Growth Okta Plunges On Earnings Outlook
Okta did not report a bad quarter, but the results and outlook add up to one thing, a downward trend in margin and tremendous pressure on the company’s earnings power. The $383 million in reported revenue is up 63.2% versus last year and caps off a year of acceleration.
The results are also 650 basis points ahead of the consensus and driven by strength in both the core subscription segment and the Professional segment. Subscription revenue grew by 64% and Professional by 50% with the total performance obligation up another 60% as well and pointing to ongoing strength in the business.
Moving down to the bottom line, the loss of $0.18 is better than expected, but far larger than last year’s $0.06 loss, and the outlook is for losses to deepen in the face of rising revenue. The guidance is calling for FY 2023 revenue of $389 million at the midpoint of the range compared to the $1.28 consensus figure with losses growing. The guidance for earnings is a loss of $1.27 versus the $0.52 consensus which is why the bottom is falling out of the market.
The Analyst's Sentiment For Okta Is Cooling
The consensus of 27 analysts following Okta is still a firm Buy but the sentiment is cooling. There have been at least 10 commentaries out in the wake of the earnings release and all include a price target reduction. The consensus of these 10 is near $225 compared to the $255 consensus and implies about 36% of upside for the stock.
The caveat is the consensus figure is trending lower over the 90 and 30-day periods and we think heading lower in the near, short, and mid-term at least. While the SaaS story and Okta, in particular, are still strong in terms of demand, it looks like the investment story is played.
The Technical Outlook: Okta Aims For Lower Price Levels
Shares of Okta appear to be near a bottom, or at least a potential support level, when looking at the daily charts, but a glance at the weekly chart belied that message in our eyes. The stock is trending lower and below a key support level that has now been confirmed as resistance.
The price action is now forming a consolidation that to us smacks of bearishness and downward momentum. The indicators are bearish but at levels that could produce a rebound in price action but, if so, we would not be buyers of this stock. Longer-term, we think Okta could fall down to $140 or lower if the institutional selling keeps up like it has been.
