Okta (OKTA) may put the whole cloud sector to the test when it reports after the bell tonight. The stock has more than doubled in 2019 with a market cap ballooning to nearly $16 billion while sales climb 50%+ year-over-year. Despite the huge growth, the stock is trading at 28.5 times fiscal year 2020 sales projections while still losing money. If Okta missteps, even in the slightest of ways, don't be surprised to see the $131 stock trading in the $100 to $110 range. That's not to say I expect it to trade to those levels, but expectations are high.
Last quarter, the company turned in a loss per share two cents above Wall Street expectations on revenues of $125.2 million, which handily beat estimates. Free cash flow turned positive versus a year ago, a highlight of the quarter for sure as the $13.2 million increase relieves the possible stress of a dilutive raise. As the company's cash pile sits at nearly $550 million, any raise would come from a want rather than a need. Although growing both revenue and subscription revenue ($117.2 million last quarter) at a clip of 50% year-over-year, investors should expect that to start to taper in the future. Okta management projects 30%+ revenue growth through Fiscal Year 2024, so a projected drop into the 40% area moving forward should not come as a shock for Q3 or Q4 of FY2020. The company already guided Q2 higher when it reported Q1, but I suspect the market will want to see improvements made to Q3 and full year projections. If not, I anticipate we'll trade lower.
Okta acts as a gatekeeper in the Identity and Access Management (IAM) sector of cloud cybersecurity. Their software limits access to users or customers to specific information, preventing access to confidential data. This Identity as a Service (IaaS) market is expected to grow to $24 billion by 2024, so there's a lot of market left for Okta to potentially capture. Currently, it is gaining traction with larger enterprise customers as it continues to displace onsite legacy identity solutions. Okta saw its customers with annual contract values (ACVs) exceeding $100,000 grow by 53% year-over-year in its most recent quarter. As much as I like the company, I do have short-term concerns expectations are too high into the current quarter.
The option's market is pricing a move around 10% by close of trading this Friday. Historically, we've seen the stock move much greater than this intraday post-earnings, but those big moves have predominantly faded below the anticipated move by the close of trading. Furthermore, they've failed to pick up over the next few days into the weekly close. What that means for traders is if you are buying volatility, then you should be prepared to close your day intraday tomorrow, at least partially, rather than roll the dice into the end of the week or even the end of the day.
While the stock hasn't had a history of gapping greater than the option's market pricing, it has been a gapper of size. Additionally, the intraday maximum move has often carried 6%+ in the same direction of the open before trading settles down and we see a regression away from the maximum move. In short, this is one to trade in the first half of the day and be done before the close.
Tim Collins provides options trade ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Tim Collins, Mark Sebastian, Paul Price, Doug Kass, and others.