3 SaaS Stocks to Buy Now: OKTA, TWLO, TTD

Software services are not a fad. These stocks will continue higher

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On Monday morning, while the rest of the markets were rising, a few stars fell out of the sky. Incredible momentum champion stocks like Okta (NASDAQ:OKTA), Twilio (NYSE:TWLO) and The Trade Desk (NASDAQ:TTD) had a really bad day. What made it seem worse is that this was happening while markets were enjoying a nice rally. Even the mighty Shopify (NYSE:SHOP) suffered. Some of the 2019 winners are stocks to buy now.

This dip may be a great opportunity to add a little risk to your portfolio. Logic suggests that if the overall stock markets are headed higher, then OKTA, TWLO and TTD stock will find footing and rally too. Onus is still on the bears to prove that they can sustain the selling in these three Software-as-a-service (SaaS) stocks. Until then, dips are buying opportunities.

OKTA, TTD, and TWLO stocks all fall under the umbrella of SaaS stocks and this rising sector not a fad. SaaS is a movement that Salesforce.com (NYSE:CRM) started years ago, and now, the whole world has adopted it. The best example of this is Microsoft (NASDAQ:MSFT) and how well they switched to the subscription model versus selling individual software hard copy releases and upgrades.

Okta (OKTA)

When I say OKTA had a bad day, it is most definitely a relative statement. Year-to-date Okta stock is still up 71% — so this is by no means a catastrophe yet. This is 3 times better than the NASDAQ Invesco QQQ Trust (QQQ) for example.

A few red ticks do not not erase the enthusiasm in the stock. But technically, the rise in OKTA stock was so fast that it left weak hands below. Meaning there are fast profits that could shake out quickly on bad days. But every dip builds a stronger base. That’s why this one may actually be a good entry point opportunity for the next few months.

OKTA is not a cheap stock. the company loses money and sells at 35 times its sales. Clearly, if the markets in general correct, it would leave OKTA stock vulnerable for much more pain ahead. So the those looking to trade it shorter term should use tight stops.

The lines to trade OKTA for the short term are clear. Once it lost $125 per share, $110 became the target and that filled on Monday afternoon. So from here the bears will have to work a lot harder to go much further. The zone below Monday’s low is support. Below $100 per share OKTA could fall another $10 before it would hit the next pivot level.

For investors who believe in the longer-term profit potential for the company, they should just buy the stock on this dip. I personally prefer to do it through options. Buying calls or shares here carries a lot of hopium. I’d much prefer selling the November $80 puts for the chance to generate income without even needing a rally. If OKTA stock stays above my level then I achieve maximum gains. Worst case scenario I keep my profit and own the shares at a 25% discount from Monday’s close. I don’t accrue losses unless OKTA falls below $79 per share.

Twilio (TWLO)

Twilio stock is also expensive as it sells at 25 times its sales. Clearly Twilio is also bloated based from traditional valuations. However, the company is poised to continue to benefit from the expansion of software services. So I don’t judge entirely on today’s valuation metrics. As long as they grow their top line, the P/E almost doesn’t matter — for a while at least.

Nevertheless, there is risk from the charts. Once TWLO stock lost $120 per share, it triggered a bearish pattern with about $20 of potential downside. So far, it has priced in almost half of it as of Monday. So here it could bounce a little before it finishes the rest of the pattern.

If I catch the Twilio stock knife today, I should know that there might be more pain ahead. So it’s a good idea to start with half a position then add to it to manage risk if needed. As far as levels, TWLO stock has a pivot near $102 per share. This is not a hard line in the sand but rather a rubber band zone.

For the same reasons as above, I like TWLO here or if it finishes the bearish pattern.

Just like with OKTA, TWLO stock bulls have the responsibility to prove that these red candles are a mere shakeout of weak hands. And that the control is still in their hands. If I’m already long TWLO, then I stay long it into the support below. If I’m looking for an entry point, this dip is as good as any especially if I do it in tranches.

Alternatively, I like to sell downside puts into what others fear. For example I can sell the TWLO November $85 put and collect $2 to open. This way Twilio stock can fall 25% and I can still retain my maximum gains. If it does fall that much, I end up long TWLO stock and break even at $84 per share.

The Trade Desk (TTD)

TTD stock also lost its footing near $230 per share and is almost completely at the measured target of $200 per share. That is an important number because it is also the point of control for the whole year. Meaning the bulls and bears like to fight hard over it. The TTD 10-month range is huge as it rallied 180% off of the December lows. Coming back to $200 is still 100% gains from the Christmas Eve dip.

This is normal price action because when a stock rises so quickly, at a certain point it has to give back some of it in order to build a better base from which the bulls can remount another rally even higher. So as long as TTD stock bulls hold above $190 per share, this drop is a non-event. If I own the shares, this is not the right time to bail on them.

On the other hand, this is a momentum stock so technically, it could fill lower gaps like the one near $160 per share. But to get there, the bears will have to work a lot harder than they did to get here. So until then this dip is a buying opportunity.

Alternatively here I would rather use options to profit and while leaving a margin of error. For example, I can sell the TTD November $135 put option and collect more than $2 to open. This means that I will profit even if TTD falls another 35% from current levels. If it falls below $133 then I would accrue losses.

Fundamentally, TTD is also bloated from the traditional valuation perspective. Its trailing P/E is 100, and it sells at 22 times at sales. But then again this is a case where investors are paying up for future potential and not current profitability levels.

Once hot stocks lose a lot of their froth, it’s hard to regain the same level of enthusiasm on Wall Street. So the extreme sustained rallies become harder to achieve. That’s why I prefer using options so to bank on downside support rather than upside potential.

It is also important to note that I never sell naked puts unless I intend to own the shares. And I never risk more than I can afford to lose.

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. Join his live chat room for free here.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/3-saas-stocks-to-buy-now-okta-twlo-ttd/.

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