Okta (OKTA) is one of the most anticipated earnings reports to close August, as the high flying company attempts to keep momentum moving into the end of 2019.
Shares of the San Francisco-based cybersecurity company have risen a staggering 111% year to date as the firm emerges as a serious contender in identity management and security.
However, shares have sunk slightly ahead of the earnings release on Wednesday and have been largely range bound over the summer. Since the solstice, shares have been essentially flat as many beg the question as to whether the valuation is simply overstretched at a hefty price to sales ratio of 34.5.
After a time being stuck in neutral, the company's report of second quarter earnings on Wednesday evening will be pivotal to either shifting into reverse or driving yet more growth into the year end.
Wall Street expects the company to lose 10 cents per share and report $131.2 million in revenue this evening, representing an over 30% improvement in each metric year over year.
The company has certainly shown an ability to overachieve even aggressive expectations from Wall Street. The firm has beat on both top and bottom line estimates 100% of the time in the past two years, cementing the growth story for the stock and leading to multiple double digit jumps post-earnings for the stock.
However, that pesky valuation has many analysts advising clients to steer clear as momentum potentially stalls in the near term even if earnings can again exceed estimates.
"We expect OKTA to meet or beat our/consensus estimates throughout our forecast period but remain neutral given the current valuation," BMO Capital Markets analyst Keith Bachman said. "We think OKTA is poised for additional growth and share gains moving forward, but we think the valuation is expensive relative to both its high-growth software and security peer group."
Moving Crowded Market
Bachman noted that while the total addressable market is certainly attractive in identity management and cybersecurity, Okta is not the only show in town.
"We view the vendor landscape within the Identity and Access Management market as very competitive given the large mix of legacy and modern vendors each vying for market share, large TAM and solid growth potential," Bachman commented. "Despite some recent consolidation, over 30 vendors continue to operate in the space, though the size and scope of product portfolios differ by vendor."
He noted that legacy vendors like IBM (IBM) , Oracle (ORCL) , Dell (DELL) , Broadcom's (AVGO) CA Technologies subsidiary, and Microsoft (MSFT) could continue to control significant market share and make penetration more difficult as many hang on to legacy products and Microsoft ups its efforts in customer retention.
Bachman added that "more modern" names like Okta, Ping Identity, Centrify, OneLogin, ForgeRock, CyberArk (CYBR) , and SailPoint (SAIL) are more appealing options based on their ability to grow and displace these legacy names. Still, that sheer number of names are vying for attention in the specific area of cybersecurity.
That is not to mention Zscaler (ZS) , which has garnered a great deal of attention in comparison to Okta and operates across more verticals in cybersecurity. Still, its best comparison might be on its likewise lofty valuation that makes it a highly speculative play at present.
Finding an Entry Point
There is very little doubt about the necessity of investment in cybersecurity companies and particularly the identity and access management capabilities that Okta offers.
"Customers recognize that they will operate in a hybrid environment for the foreseeable future but as more workloads move to cloud - OKTA is increasingly seeing larger customers adopt their platform as the bridge between on-prem and cloud applications," Deutsche Bank analyst Gray Powell wrote in a recent note to clients. "Identity is now a critical part of the security stack and legacy solutions were not built with a security-first mentality."
That shift in cloud demand and security focus is the subject of very little debate, but the hulking valuation for the still unprofitable business that could prove highly risk for those eyeing the stock certainly is.
With short interest poking up on the stock and charts not overly encouraging, there might be room to wait and see what the implication is on Wednesday evening before getting carried away on the bull case and instead finding a better entry point for a long term position rather than a momentum trade.
For more on why investors should not get too comfortable with a long position in Okta, check out the charts here.