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Don’t Try to Catch Okta Stock’s Falling Knives

Undoubtedly, cloud services companies like Okta (NASDAQ:OKTA) offer the most relevant products and platforms. With more organizations taking advantage of the connectivity and cost efficiencies that cloud functions provide, OKTA stock has witnessed a surge in buying interest.

Source: Sundry Photography / Shutterstock.com

That said, the industry is still relatively in its infancy. While early leaders like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) have emerged to take the lead, there’s no guarantee that they’ll keep it. Technology is always in flux, and demand — or lack thereof — can change on a dime.

Previously, this circumstance has benefited Okta stock. But recently, Wall Street has apparently take a dim view on the cloud and various tech names. On Monday, OKTA stock dropped nearly 10%. That made it one of the worst performers of the day.

What Happened to OKTA Stock?

Naturally, whenever we see a massive hemorrhaging in the markets, we want (or demand) an explanation. In most cases, the answer is apparent: A company flubbed an earnings report or the industry faces a decimation in revenue-making opportunities.

But with Okta stock, none of these things apply. For one thing, shares have absolutely skyrocketed this year. Even with Monday’s market erosion, OKTA is up almost 73%. That, my friends, is what we call resiliency.

It also points to the fact that, up until at least recently, investors believed in the narrative for OKTA stock. A quick rundown of their client list reads like a “who’s who” of major industry players. For example, we’re talking about names like JetBlue Airways (NASDAQ:JBLU), Adobe (NASDAQ:ADBE), and Western Union (NYSE:WU).

Fundamentally Okta stock is on the up and up. About two weeks ago, OKTA released its earnings report for the second quarter of fiscal 2020. As a bull, the company provided exactly what you could hope to expect. On the profitability front, the company narrowed an expected loss of 10 cents per share to a loss of 5 cents. On the top line, OKTA rang up $140.5 million, easily surpassing the consensus estimate of $131 million.

Yet OKTA stock dropped on the financial disclosure, puzzling many onlookers. Curiously, shares never really recovered. For those hoping that Monday would provide a fresh spark, they were obviously badly disappointed.

Worst of all, no one knows why. However, peer-to-peer comparisons offer some clues. For example, several rivals, including Twilio (NYSE:TWLO) incurred double-digit losses on Monday. Although it’s speculation, investors may be rotating out of tech plays and into what are perceived as safer opportunities.

Portfolio Shifting May Have Hurt OKTA Stock

In the absence of a better explanation, investors probably shifted their exposure to safer bets. This in turn created, and then later amplified, volatility in OKTA stock.

First, while the cloud services company’s bulls have lauded its growth trajectory, I must bring up the counterargument: The robustness of that growth has declined significantly in magnitude.

For example, back in Q1 of calendar 2017, OKTA generated $49.3 million, which was good for an 82% lift from the year-ago quarter. In the most recent earnings report, the year-over-year lift was comparatively small at 48.5%. With the exception of a few quarters, the sales growth rate has consistently declined between Q1 2017 to Q2 2019.

Ordinarily, that shouldn’t cause panic. Because of the law of small numbers, it is increasingly difficult to sustain outrageously high growth rates as the nominal revenues get bigger. However, OKTA’s quarterly revenue is now $140 million, which isn’t that big compared to its market capitalization of $13 billion. Thus, investors might be freaked out about the rich premium on Okta stock.

A second point to consider is which names jumped on Monday. I can’t help but notice that energy-related names, like Helmerich and Payne (NYSE:HP) and National Oilwell Varco (NYSE:NOV) outperformed. Perhaps with the noise President Donald Trump’s administration has been making geopolitically, investors see value in recently undervalued companies.

How to Approach OKTA

Overall, I have reservations about engaging a technically overheated play like OKTA stock. Even with Monday’s decline, I still have these reservations.

Irrespective of your opinion about Okta stock, we must respect that the markets severely penalized it. With the volatility, shares are now sandwiched in between the 50-day moving average and the 200-day moving average. It’s currently straddling an area of weak support, suggesting further volatility.

For conservative investors, I’d stay away for now. If on the other hand you’re bullish on OKTA, you might enjoy this discount. Still, my bet is that a deeper discount lies ahead for those who wait.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/dont-try-to-catch-okta-stocks-falling-knives/.

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