Despite reporting a 57% jump in year-on-year revenue earlier this month, shares of Okta (NASDAQ:OKTA) are trading lower now than they did before the earnings release. That revenue figure was well ahead of what analysts were expecting too, but perhaps the fact that Q2 GAAP EPS came in both below expectations and in the red explains the softness seen in the share price since.
Still, the longer your time horizon, the more things there are to like about Okta. They’re marginally shy of being a $40 billion company that’s still able to grow their subscription revenue by close to 60% year over year with no signs of that pace slowing down. Management’s outlook for Q3’s total revenue was ahead of the consensus as was their outlook for full-year revenue. If one can look past the dodgy EPS print, which was surely somewhat based on acquisition costs associated with the recent purchase of Auth0, it’s quite clear that Okta has a lot more going for it than against it.
Comparative Underperformance
This makes the stock’s performance in recent weeks all the more puzzling and all the more interesting for those of us on the sidelines. Shares hit an all-time high of $294 back in February and have struggled to confidently retest this level in the seven months since. But it’s also true that the bears have been unable to take the stock below $200, a level of support that’s been in play since the first half of last year. So what we’ve seen happen over the summer is a host of lower highs and higher lows, meaning the trading range of Okta’s shares is starting to tighten up. This is a well-known technical pattern often referred to as a “pennant” and tends to precipitate a breakout. Taking into account the recently reported growth figures, as well as comments from several sell-side heavyweights, you’d be hard-pressed to not back any future breakout to be to the upside.
In the aftermath of this month’s report, the folks over at Needham upgraded shares from a Hold to a Buy rating, on the basis of the underwhelming response seen in shares to what was in reality a solid update. They also tacked on a fresh price target of $320, which suggests there’s an upside to be had in the region of 30% even from where shares closed yesterday evening. In a note to clients, the said “concerns that core Okta was slowing should be soothed since core delivered 39% year-over-year revenue growth, 43% remaining performance obligation growth, and 47% total calculated billings growth. These numbers represent a solid acceleration."
At the same time, Needham pointed out that Okta has been sluggish for the better part of the year to date, underperforming both the broader market and its high growth peer group. For those of us considering opening a position, there’s a strong argument to be made that Okta is trading at a comparative discount on valuation terms alone.
Compelling Entry Point
Needham’s bullishness echoed that of Raymond James from around this time last month, when the latter wrote that “this former angel has fallen far enough, and should regain its wings." These lofty comments were part of a move that saw them upgrade Okta stock from Outperform to a Strong Buy rating, while also boosting their price target. Analyst Adam Tindle and his team were conscious of how much shares had underperformed while at the same time offering investors a bunch of noteworthy catalysts.
Tindle wrote at the time that he saw "a rare valuation dislocation at present in an asset that has significant potential to be a consolidator in the universal use case across one of the most attractive growth markets in technology." One of the catalysts just ahead of the upgrade and these comments was the company’s Q2 earnings report, which as we’ve seen was for the most part stellar. But still shares are currently trading 13% lower than where they were before the release. With that in mind, it’s hard not to believe we’re looking at a very decent entry point and compelling long opportunity with Okta right now, and one that might not be around for very much longer.
