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Monday, October 10, 2022 9:51:33 AM
By: Zacks Investment Research | October 10, 2022
Okta (OKTA) is a $9 billion provider of identity security for enterprises. This is a key service where password security is a continuous vulnerability point.
Primary products consist of Okta IT and Okta for Developers. Okta IT Products include Single Sign-On, Mobility Management, Adaptive Multi-Factor Authentication, Lifecycle Management and Universal Directory.
Okta for Developers includes Complete Authentication, User Management, Application Programming Interface Access Management and Developer Tools.
Estimates Higher, Stock Clobbered After Quarter Confusion and Management Moves
On August 31, Okta reported second-quarter fiscal 2023 adjusted loss of 10 cents per share, beating the Zacks Consensus Estimate by 66.67%. The company had reported a loss of 11 cents per share in the year-ago quarter.
Total revenues surged 43.2% year over year to $451.8 million and surpassed the consensus mark by 4.93%. The upside can be attributed to higher subscription revenues.
Subscription revenues (96.4% of total revenues) surged 43.6% year over year to $435.4 million. Professional services and other revenues (3.6% of total revenues) increased 32.7% year over year to $16.4 million.
While the company's Q2 revenue was solid, leading indicators slipped and expectations for second half billings were lowered as Okta is facing some sales integration challenges with the recent Auth0 acquisition, with heightened attrition and some product confusion, to say nothing of a surprising sabbatical announcement from the COO.
And the implied growth of 19% from management projections is down from 27%.
OKTA shares got hit for 34% on September 1 after this report.
Analysts Run In the Aftermath
The reactions after the quarter have been interesting. While this year's EPS estimates naturally had to move higher on the big positive earnings surprise, there were upward revisions into next year too despite the company re-evaluating out-year targets.
Next year's consensus leaped higher from a loss of 60-cents to a loss of only 31-cents.
But analysts also downgraded the stock across the board on other factors.
Stifel analyst Adam Borg lowered the firm's price target on Okta to $85 from $115 and kept a Hold rating on the shares following a "disappointing quarter" that included go-to-market integration and execution issues with Okta/Auth0.
Borg also noted the uncertainty around COO/Co-founder Kerrest taking a one-year sabbatical, Chief Product Officer Jolly leaving the company, a lowering of fiscal year billings guidance and the re-evaluating of its existing FY26 targets.
He continues to believe Okta is going after a large identity market opportunity and said the "valuation is not overly demanding," but Borg views the stock as "squarely in the penalty box."
Mizuho analyst Gregg Moskowitz lowered the firm's price target on Okta to $110 from $150 and kept a Buy rating on the shares after the company reported "mixed" Q2 results and lowered its FY23 billings outlook, due largely to sales integration challenges associated with core OKTA and Auth0.
While "disappointed" by the results and outlook, Moskowitz notes Okta's valuation and its position as "the leader in the critically important" identity/access management market.
BTIG analyst Gray Powell lowered the firm's price target on Okta to $117 from $152 and kept a Buy rating on the shares. The company's Q2 results were "mixed" with a slight beat on current RPO offset by issues with Auth0 integration, sales attrition, and a weak macro environment driving a cut in its FY23 billings guidance.
Powell concluded that while he was disappointed by the quarter, he remains positive on Okta's 25% long-term growth story and was also "somewhat encouraged" by the company's increased focus on improved profitability.
Morgan Stanley analyst Hamza Fodderwala downgraded Okta to Equal Weight from Overweight with a price target of $93, down from $150. While Fodderwala still views Okta as a long-term share winner in Identity and Access Management, which the analyst identifies as "a large and rapidly growing market opportunity," recent sales execution issues and ongoing challenges with respect to integrating the Auth0 acquisition from last year leave the company without an effective go-to-market vehicle.
Fodderwala says the company strategic advantage "will take time to recover." Sales execution issues, challenges with M&A integration and a tough macro backdrop add up to leave limited visibility on a return to stabilization.
Finally, on September 15, Jefferies analyst Joseph Gallo initiated coverage of Okta with a Buy rating and $90 price target. The stock's 73% decline year-to-date on "myriad issues," including the cyber incident, macro environment and sales integration, is an "overcorrection."
Gallo sees an attractive entry point for a "leading cyber asset." He believes Okta has a "fantastic product" with a "large and underpenetrated" market.
Bottom line on OKTA: With its unique market position, and buoyant topline growth of 28%, Okta should be a good long-term investment as it falls back to levels not seen since December of 2018.
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