Okta Inc. (OKTA)

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Okta stock surges as Wall Street thinks software company is 'partially out of the woods'
By: Morningstar | March 2, 2023

Analysts say Okta 'still has work to do,' but forecast for more than double the profit Wall Street expected 'remains abundantly prudent'

Okta Inc. shares rallied Thursday as Wall Street greeted the identity-management software company's forecast of profitability for the year with cautious optimism as it navigates a tight cloud-software spending environment.

Okta (OKTA) shares rallied nearly 15% to an intraday high of $81.55 Thursday, just a quarter after posting their strongest day ever, after Okta Chief Executive Todd McKinnon pledged profitability in 2024. This time around, that profitability forecast ended up being more than twice what Wall Street had been expecting, but many analysts had likely been taking a wait-and-see approach.

Citi Research analyst Fatima Boolani, who has a neutral rating on the stock and an $87 price target, called Okta's report a "high-octane turnaround in motion." The outlook continues to be underpinned by "'hyperconservatism'/prudence against still-tough macro (mostly Americas, weakness seeping into enterprise) and suboptimal sales productivity hangover."

The hangover Boolani is referring to is Okta's refocusing of its sales force following its $6.5 billion acquisition of identity-platform Auth0 (pronounced "Auth Zero"), which closed in May After inheriting a large sales force from Auth0, Okta experienced initial difficulties in coordinating who was selling what products.

"While Okta admittedly appears partially out of the woods, this being the first quarter of self-help-led recovery plus our skittishness on renewals/shortening contract duration/new logos, keep our optimism/rating in check," Boolani said.

Jefferies analyst Joseph Gallo, who has a buy rating and a $100 price target, said Okta's outlook "remains abundantly prudent," and that results had been "better-than-feared" given "tempered expectations."

Guggenheim analyst John DiFucci, who has a buy rating and a $90 price target, said Okta is just trying to "keep it simple" to set up another beat-and-raise quarter.

"While our field work indicates some improvement in Okta's go-to-market motion, the company still has work to do," DiFucci said. "Regardless, we continue to believe that there's little risk in FY24 guidance."

Morgan Stanley analyst Hamza Fodderwala, who has an equal-weight rating and an $84 price target, said the real surprise from the report was that the company's operating-margin forecast was more than 400 basis points above the consensus, "highlighting the inherent [operating] leverage and best-in-class unit economics of OKTA."

Okta forecast adjusted earnings of 11 or 12 cents a share on revenue of $509 million to $511 million for the first quarter, and full-year earnings of 74 to 79 cents a share on revenue of $2.16 billion to $2.17 billion.

Analysts surveyed by FactSet had forecast a break-even top line on a per-share basis for the first quarter on revenue of $498.5 million, and 36 cents a share on revenue of $2.15 billion for the year. By Thursday, the Wall Street consensus had risen to 10 cents a share on revenue of $510.4 million for the first quarter, and 72 cents a share on revenue of $2.17 billion for the year.

Of the 41 analysts who cover Okta, 26 have buy-grade ratings, 11 have hold ratings, and four have sell ratings. Of those, 28 hiked their price targets on the stock, resulting in an average price target of $89.75, up from a previous $80.36.

Even with a 20% gain over the past three months, Okta's stock is still down 57% over the past 12 months, while the S&P 500 has declined 10%, and the tech-heavy Nasdaq Composite has dropped 17%.

Over the past year, the iShares Expanded Tech-Software Sector ETF (IGV) has fallen 18%, the Global X Cloud Computing ETF (CLOU) has dropped 19%, the First Trust Cloud Computing ETF (SKYY) has dropped 28%, and the WisdomTree Cloud Computing Fund (WCLD) has plummeted 33%.

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