3 Big Reasons Now Is the Time to Buy the Dip in Okta Stock

Recent weakness in OKTA stock offers investors a compelling long-term entry point

Cloud security company Okta (NASDAQ:OKTA) has been one of Wall Street’s favorite growth stocks for a long time; until recently. After rallying from its $17 IPO price in April 2017 to $140 by July 2019, OKTA stock has since crashed 25% off those July 2019 all-time highs. Shares presently trade just north of $100.

3 Big Reasons Now Is the Time to Buy the Dip in Okta Stock
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In the big picture, the recent plunge in OKTA stock price has created a compelling long term buying opportunity.

The logic is simple. Okta is changing the game in the cloud security world, employing an identity-based approach to security that optimizes enterprise, employee, and workflow flexibility without compromising security integrity. This identity-based approach to cloud security is the future of cybersecurity, and Okta is the pioneer and leader in identity-based security.

Further, cloud security is becoming an increasingly important industry in the global IT world as: 1) enterprises more broadly pivot into cloud-based services, and 2) enterprises more broadly collect, store, and analyze data that needs to be protected.

Net net, Okta projects as a significant share gainer in the secular growth cloud security market over the next several years. That position means Okta will grow revenues and profits by leaps and bounds in the long run. All that growth should ultimately power the stock higher in the long term.

All things considered, then, OKTA is a buy on this dip.

The Fundamentals Support $130 Upside

The first big reason to buy the dip in OKTA stock is that the fundamentals provide support for the stock at $130 by the end of 2019.

Okta provides cloud-based identity access management solutions. Essentially, they protect enterprise data and workflows by using personal armor. Traditional cloud security solutions are focused on building a castle of security surrounding the whole ecosystem. Okta is focused on outfitting each individual in the ecosystem with an armor of security.

This is a superior solution. Traditional security solutions are constraining, and don’t allow for much individual and workflow mobility. IAM solutions address these shortcomings. If everyone has a body of armor, it doesn’t matter where anyone goes – they will always be protected and secured. Thus, Okta is optimizing for mobility while maintaining security integrity.

The growth runway here is very long. Global IT spend measured $3.6 trillion in 2018. IAM solutions accounted for just 0.3% of that spend, but that share is rapidly growing, and projects to keep growing because of IAM’s mobility advantages (13% CAGR into 2025). In the IAM market, both Gartner and Forrester recognize Okta as the unchallenged leader. Thus, Okta is the leader in the hyper-growth niche of a secular growth market.

Naturally, that means that Okta projects as a 20%-plus revenue grower for a lot longer. This is also a very high gross margin business with tremendous room for opex leverage in the long run, so profits – which are non-existent today – could be quite large at scale.

Indeed, I think Okta can net about $11 in EPS by calendar 2030. Based on a big growth 30-times forward multiple and a 10% discount rate, that equates to a 2019 price target of nearly $130.

The Optics Should Improve

The second big reason to buy the dip in OKTA stock is that the optics should start to improve over the next few months.

Broadly speaking, the recent plunge had nothing to do with Okta, or the fundamentals underlying Okta. Instead, it was all optics. There was a massive shift in equity markets from momentum to value stocks in early September, sparked by a sharp rise in historically low-interest rates (which were providing support for the stretched valuations on momentum stocks).

As the 10-Year Treasury yield rose roughly 40 basis points through the first two weeks of September, momentum stocks plunged, including OKTA.

But, the sharp rise in yields was the result of investors pricing in improving U.S.-China trade tensions. Sure, the trade war is de-escalating, but it’s not going away anytime soon. U.S. President Donald Trump is dealing with an impeachment inquiry, and China is unlikely to strike a deal with their “adversary” when he is essentially on trial. Thus, the trade war is here to stay for the foreseeable future.

So long as the trade war hangs around, yields won’t move that much higher. That’s especially true since the Fed is cutting rates, and inflation remains largely muted. Thus, rates project to stay lower for longer.

That will help OKTA stock. Indeed, as the 10-Year Treasury yield has dropped roughly 20 basis points over the past two weeks, OKTA stock has found its footing around $100. That isn’t a coincidence.

The Worst Is Over

The third big reason to buy the dip in OKTA stock is that the technicals imply that the worst is over.

There are two things to note here. First, throughout the summer of 2019, OKTA stock was forming a bearish head-and-shoulders pattern. That pattern has now largely played out, and OKTA appears to be finding its footing at the level it was at prior to the head-and-shoulders pattern emerging.

Second, OKTA stock has found its footing at the big, round number of $100. That’s psychologically huge. So long as OKTA holds this $100 level, the most likely path forward is a rebound from $100, not a plunge below $100.

Bottom Line on OKTA Stock

OKTA is a long term winner that has dropped into bear market territory, due to no fault of its own. The fundamentals say the stock is now undervalued. The optics imply that a rebound is coming soon. And, the technicals imply that the worst of the sell-off has already played out.

Consequently, at $100, now looks like a good time to buy the dip in OKTA stock.

As of this writing, Luke Lango was long OKTA.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/3-big-reasons-now-is-the-time-to-buy-the-dip-in-okta-stock/.

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