Okta Stock May Be Preparing to Take a Real, More Permanent Plunge

Okta stock might be the canary in the coal mine for commoditized tech

Okta (NASDAQ:OKTA) isn’t exactly a household name. Enough people knew about it though (and liked it well enough) to Okta stock from its early-2017 IPO price of $17 to its July high of $141.85.

Okta Stock May Be Preparing to Take a Real, More Permanent Plunge
Source: Sundry Photography / Shutterstock.com

Then, everything changed. The stock has peeled back from that high to its current price near $103 and is seemingly testing even lower lows. The 27% meltdown Okta stock has suffered in fewer than two months is the biggest selloff it has seen since became publicly traded.

The likely reasons include that Okta pushed the average maturation date on some of its debt down the road. On top of that uninspiring decision, several cloud-computing names like Twilio (NYSE:TWLO) and Slack Technologies (NYSE:WORK) have also stumbled into selloffs over the course of the past few days. Industry influence can be potent at times.

There’s a more likely underlying reason OKTA has been hammered after being such an incredible performer though. That is, it’s wildly, ridiculously overvalued, with little hope of ever justifying what was at one point in July a more than $16 billion market cap.

A Closer Look at Okta Stock

Okta offers computer login-security services, remotely preventing unauthorized access to protected information. If you log into an app at work or even via your smartphone, it’s possible you’ve passed through an Okta-managed digital gate.

It’s an important business given the countless number of data breaches and computer hacks we’ve seen of late, but it’s not a business with a particularly high barrier to entry.

The crowded field is evidence of that. Twilio is in the same arena, as is Nexmo. And Bandwidth. And Hearsay, Plivo and Voxbone just to name a few, along with dozens of other players.

It’s not just the small startups in the business though. Big rivals offer comparable services. Though Forrester gave Okta the highest praise in the second quarter of the year by calling it the leader of the IDaaS (identification as a service) industry, that industry’s players also included Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).

No company wants to have to stand up to Google or Microsoft.

It’s not a message fans and followers of Okta want to hear about, and it’s certainly not the new and modern way of thinking about evaluating equities. A good story is good enough. The idea is all the matters. The trajectory rather than the current situation is the key.

Except, those premises are only true for a short while. Eventually, a company has to make some real money that at least comes close to making sense given its price.

Even with its 27% selloff, Okta stock still isn’t even close.

The Real Problem for Okta Stock

The sheer quantity and quality of its competition is only half the concern suddenly weighing Okta down, however. The other half is a valuation that makes little sense even if Okta can outpace its rivals.

Forget the lack of earnings for the moment; lots of companies bleed cash in their infancy. Even just focusing on revenue, Okta is valued at a stunning 25.7 times its trailing sales of $486.8 million.

The S&P 500’s price/sales ratio right now is an above-average 2.2. By that measure, Okta is overvalued by a factor of more than ten.

Okta would need to grow its top line all the way from $486 million now to $5.6 billion to fairly justify its current market cap of $12.3 billion. Even allowing a little more wiggle room that tech stocks often command, a top line of $5 billion would still be a necessity. That’s more than a 1000% improvement in sales in a market that Microsoft and Google are also in.

Earnings growth would have to be even more dramatic to justify the stock’s current value, working its way out of the red.

The Reality for Okta Stock

The digital future will undoubtedly require even more secure login architecture. Okta provides it.

Unfortunately, so do dozens of other companies. Investors went nuts in particular over this one, however, without ever really asking questions like, “How much revenue can this one company produce?” and “How much of that revenue can be turned into a viable, sustainable profit when the service is essentially a commodity?”

Increasingly, investors are realizing that the company’s insiders and early investors had more to gain by going public and touting the stock than they did by building the company’s revenue base. The same goes for rivals. It’s also arguable these insiders and major stakeholders of all these companies were ultimately gunning for an acquisition that’s looking less and less likely.

The timing of these realizations remains one of life’s great trading mysteries.

And that’s not to say Okta stock won’t bounce back from its recent setback. It probably will. Anything dropped from enough height will bounce. The question is, can any bounce be sustained?

The scope and speed of the selloff, however, suggests the cloud-identification market’s investors just had their aha moment. Okta’s honeymoon period is officially over, and that ain’t good for existing shareholders.

As of this writing, James Brumley held a long position in Alphabet. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/okta-stock-permanent-plunge/.

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