Okta On Verge Of Multi-Week Rally

After a vicious selloff that saw shares of identity software company Okta (NASDAQ: OKTA) fall 70% from last November through last month, they’re finally looking like they’re ready to turn around. Investors have to go all the way back to January to find a run of two green weeks in a row, and even those were unconvincing. But assuming yesterday’s 10% jump will be sustained, if not bettered, into this evening’s close, they’ll have their best-looking pair of weekly candles since last year. 

While we’re all familiar with rising inflation and interest rates being the primary reasons for the aggressive selling, the reason for this week’s jump is a bit more specific to Okta themselves. The company’s Q1 earnings were released after last night’s bell and shocked investors in the best way possible. 

Impressive Numbers

For starters, the steep loss expected on the bottom line print wasn’t nearly as bad, while top-line revenue also came in much better than expected. The 65% year-on-year growth rate it logged for the quarter will give many food for thought as we head into the weekend. Wall Street will be asking itself if the current prices are reasonable considering Okta shares are back trading at 2019 levels, while registering that kind of revenue growth. 

Management’s forward guidance for Q2’s revenue was also well ahead of the consensus, which will force a recalculation of what fair value looks like. Todd McKinnon, CEO, and co-founder of Okta, said with the results that “we delivered solid first-quarter results highlighted by strength in new customer additions, dollar-based net retention rate, and the success we’re having with large customers as they continue their journey to the cloud. Organizations around the world have made it clear that identity is the foundation for their digital transformation projects and zero-trust security environments. Okta is the recognized leader in identity and we’re confident in our ability to capture more of the massive market opportunity.”

Unsurprisingly, their shares were already trending higher yesterday in anticipation of the report and finished up an impressive 10%. But in the after-hours session, it was a different story altogether. Once the numbers were released, Okta shares popped another 18%, and they looked happy to hold onto those gains in Friday’s pre-market trading.

The bullish report will do much to counter the most recent negative update on the San Francisco headquartered company’s stock. It’s barely three weeks since the team at Wells Fargo lowered their price target on Okta stock. It had been a lofty $175, and to be fair, the new $130 still implies 40% upside from where shares closed last night. Analyst Andrew Nowinski wrote in a note to clients at the time that “our target multiple is a discount to the peer group average of 9x, which we believe is justified due to lower profitability assumptions, partially offset by higher revenue growth assumptions." 

Massive Upside

Nowinski and his team reiterated their Buy rating at the time, a move that echoed that of the Morgan Stanley team who did the same towards the end of April. They also reiterated their Overweight rating while trimming their price target from $270 to $200, a price per share that would involve a very attractive 110% move north, were shares to hit it. Analyst Hamza Fodderwala said at the time that with the “strong secular tailwinds, larger deal opportunities in the faster-growing customer identity and access management segment and upside from M&A synergies post Auth0 salesforce integration, we think there are lots to like in Okta”. 

It will be interesting to see what other kinds of analyst updates come out now as a result of this week’s earnings report. One thing is for sure though, there’s every reason to think that last week’s low of $78 will remain the low for some time and that investors will now be thinking about how high shares can go versus the opposite. Even with the rally this week so far, the stock’s RSI is still under 30, suggesting extremely oversold conditions remain. We can expect a strong bid to be present into the weekend, and likely into the rest of the summer now as well.