• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Stocks

Okta Aims to Defend Lofty Valuation on Earnings

Outlining Okta's earnings prospects on Wednesday is a tale of tempting TAM and troublesome valuation.
By KEVIN CURRAN Aug 28, 2019 | 10:26 AM EDT
Stocks quotes in this article: OKTA, IBM, ORCL, AVGO, MSFT, CYBR, SAIL, ZS, DELL

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.

Earnings Expectations

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.

(Microsoft is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MSFT? Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Employees of TheStreet are restricted from trading individual securities.

TAGS: Investing | Markets | Stocks | Cybersecurity | Software & Services | Technology | Analyst Actions | Stock of the Day | Earnings Preview

More from Stocks

Does the Big Bounce Mean More to Come? Let's See What Drove the Move

James "Rev Shark" DePorre
Jun 24, 2022 4:42 PM EDT

Much of the rally can be attributed to structural reasons, not fundamentals, technicals, or even macro ones.

MongoDB Is Poised for a Rally

Bruce Kamich
Jun 24, 2022 2:15 PM EDT

Here's our initial upside price target for MDB which provides a general purpose database platform.

See That Down the Road? It's the Big 'Green' Bubble, Ready to Pop

Jim Collins
Jun 24, 2022 1:30 PM EDT

Environmental, social, and corporate governance has created a monster and gullible investors should hit the brakes on their EVs and run from the Washington technocrats while they have the chance.

When Times Are Tough, These 3 Mega-Caps Should Deliver the Dividends

Bob Ciura
Jun 24, 2022 1:00 PM EDT

Here's why in recessions and bear markets, the right mega-cap stocks can offer security -- and good yields.

Atlassian Is Now in the Latter Stages of Its Decline

Bruce Kamich
Jun 24, 2022 12:22 PM EDT

Let's check the charts and indicators.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 08:55 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The 10 personality traits of successful traders an...
  • 12:08 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10

    As a Portfolio Name Agrees to a Merger, Here's Our...
  • 10:44 AM EDT PAUL PRICE

    My Very Best Pick for the Next 12 Months

    American Woodmark . It rarely gets better than th...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login