Okta (NASDAQ:OKTA) reported earnings last night and OKTA stock is down 12% on the headlines. This is the same old story where the company beats on both the top and bottom lines. But management guidance was not perfect for the coming periods.
Investors these days are obsessed with the forecasts … maybe too much so. This is especially true, now that we have a market-wide mini sentiment crisis again as politicians are playing chess with the world’s economies.
Just last night we learned that Chinese exports fell 20% from this time last year so there are dynamics at play here beyond all company scope, so management teams have no choice but to be cautious.
The company increased sales by 50% from last year and it even guided up its full-year sales above expectations. Investors took issue from the weaker earnings forecast even though OKTA just delivered a loss that was half as much as what was expected. OKTA also announced the acquisition of Azuka.
Luckily, OKTA stock came into the event up 27% year-to-date, which is more than double that of the S&P 500. So the stock has some room to give back and support levels below.
But first, let’s look at the fundamentals. It is our human nature to require privacy and security. That’s why we build homes with locks and fences. But with the advent of electronics and with the continued dependency that we have for it, we now find it hard to achieve the sense of security in our digital life. Okta helps with that so their services will remain in demand for a while.
The online privacy became the hot-button last year when Facebook (NASDAQ:FB) had its Cambridge Analitica issue but it wasn’t alone. So as a result, we now know that our private data is at risk everywhere. People feel violated and they demand action and this benefits services like OKTA’s.
Wall Street saw this opportunity and fell in love with the concept. When that happens it overdoses and buys stocks with too much vigor. Okta stock rose 105% just from November. So giving back a little here is normal. The report management delivered does not change the bullish thesis. This is a growth stock, so I don’t worry a lot about the bottom line. They are bound to spend a lot to grow fast. So for now, selling it on an earnings miss is a mistake.
How to Approach OKTA Stock After Earnings
Most often we see investors push stocks to extremes in both ways and the pendulum swings too far up, then too far down. But, in reality, somewhere in the middle lies the truth. In this case, $87 per share may have been too high too fast, and on the way down, it’s probably going to overshoot lower than it should. But it will find footing.
Technically, the first support zone should be around $73 per share. This was the neckline from which it broke out mid-January. Such pivot levels usually provide support on the way down because bulls and bears would want to fight it out hard again if and when it gets there. If it fails, there is another similar pivot around $63 that has been in contention since last June.
This report changes nothing for those who bought the stock for the long term, so there is nothing to do. I could buy puts to protect equity for the short-term during this headline riddled period. For those looking for an entry point, this dip could be a decent starting point. But I don’t do all at once so I’d have the chance to average down in case the selling lingers.
This is especially true since we have a stock market that’s throwing a fit and they will take all stocks down regardless of individual fundamentals or technical data. Also, often big drops like Okta stock is doing today are not one-day events. This is a momentum stock, so it moves fast in both directions. When they fall, they appear to be headed to zero. So this is a dangerous knife to catch.
In summary, the world will need services like OKTA in the future even more than it does now because the shift to a digital life trend is not a fad and will not reverse. So it will become even more essential for us to have these services to manage our interfaces. So as long as OKTA management is able to execute on plans like this, their future should be bright. Short-term dips like these shall pass. Wall Street experts agree as most of the analysts that cover OKTA rate the stock as a BUY or STRONG BUY and it is trading mid-range of their price targets.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.