Why Okta (OKTA) Shares Are Trading Lower Today

What Happened:

Shares of identity management software maker Okta (OKTA) fell 18.6% in the morning session after the company reported second-quarter earnings results. Its current RPO (a leading indicator for future revenue) forecast for next quarter fell short of Wall Street's estimates, potentially signaling some softness. Management highlighted a challenging macro environment, which has mostly impacted the ability to win new business relative to upsells. The company also observed budget scrutiny from customers triying to justify their software spend, and this affected metrics such as MAU (monthly active users) and seat count. These issues were mainly concentrated in the SMB segment. 

On the other hand, Okta beat analysts' revenue, operating income, and EPS estimates. Its revenue and EPS guidance for the full year also topped expectations. Overall, this was a challenging quarter for the company.

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What is the market telling us:

Okta’s shares are very volatile and over the last year have had 11 moves greater than 5%. But moves this big are very rare even for Okta and that is indicating to us that this news had a significant impact on the market’s perception of the business. 

The biggest move we wrote about over the last year was 6 months ago, when the stock gained 27.7% on the news that the company reported an impressive "beat and raised quarter". Fourth quarter results outperformed Wall Street's revenue estimates, alongside strong free cash flow. Okta also provided optimistic revenue guidance for the next quarter, which exceeded analysts' expectations. 

Also, the company slightly raised its FY'25 outlook and now expects revenue growth of 10% to 11%, a non-GAAP operating margin of 18% to 19%, and a free cash flow margin of approximately 21%. Management highlighted the conservatism baked into the guidance given the "stable but still challenging macro environment." 

Moving on, the outperformance suggests that the recent security incident, which was reported in October 2023 and affected some of the company's products, had minimal impact on its financial position, reassuring investors. Also, the company is focused on optimizing its cost structure following the recent layoff, which affected 400 positions. Going forward, Okta is focused on growing its headcount in lower-cost regions such as India and Poland. 

Overall, this was a strong quarter for the company, providing more reasons for investors to stay positive.

Okta is down 6.5% since the beginning of the year, and at $81.20 per share it is trading 27.2% below its 52-week high of $111.49 from March 2024. Investors who bought $1,000 worth of Okta’s shares 5 years ago would now be looking at an investment worth $639.12.

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