It seems like everybody and their dog is investing in money-losing stocks these days. And I’m not just talking about tech stars like Okta (NASDAQ:OKTA) and Twilio (NYSE:TWLO), although Okta stock is a better pick than you might think.
The experts say it’s all about scale.
Get enough sales and eventually, your scale will generate gobs of profits. Heck, it worked for Amazon (NASDAQ:AMZN), so why wouldn’t it work for Okta, a leader in the IDaaS (identification as a service) industry?
OKTA Stock up Nicely
Enough investors must feel this way or OKTA wouldn’t be up 62% year to date through September 18 and 510% from its April 2017 IPO price of $17. You can’t fight the trend.
Lately, though, Okta has taken it on the chin, losing 19% in the last month alone. Two reasons have moved OKTA stock lower.
First, SaaS (Software as a Service) stocks, in general, have been in a downward trend in September, including Twilio, which I mentioned previously. Again, you can’t fight the trend.
Secondly, the company announced in early September that it would issue $1 billion in convertible senior notes due in 2025 that pay interest of 0.125% and convert into 5.2991 shares ($188.71 conversion price).
Given its shares are trading around $103 as I write this, it’s unlikely buyers of the notes will be converting the notes anytime soon.
However, the issue also allows buyers of 2023 notes, who receive 0.25% interest and can convert at a price of $48.23, to exchange their 2023 notes for the newer 2025 notes.
Seeking Alpha contributor From Growth to Value discusses the possible dilution scenario in a recent article.
Suffice to say, in addition to the fact it’s losing 33 cents for every dollar of sales at the moment, there are also some short-term constraints holding it back.
As my InvestorPlace colleague James Brumley stated recently, “Okta’s honeymoon is officially over.”
That might be true, but I’ve got a reason you might want to hang tight.
A Special Insider Still Holds OKTA Stock
If you take a look at OKTA’s beneficial ownership as of April 1, 2019, you will see that co-founders Todd McKinnon, Frederic Kerrest, and Ben Horowitz hold a combined 12.5% economic interest as well as 50.7% of the voting stock. You will also see that original VC investor Khosla Ventures, holds 6% of the votes and a 1.1% economic interest.
Why is this significant?
Vinod Khosla is one of the most successful venture capitalists in America. He’s worth approximately $2.1 billion according to Forbes. More importantly, he is very selective about the companies in whoch his firm invests.
When Okta went public in 2017, venture capital firms owned 66% of the company’s shares. Of the 54 million shares owned by the VCs, Khosla had 6.6 million. Today, the only VC firm still holding is Khosla with 1.2 million Class B shares, which carry 10 votes per share, rather than the one vote per share that comes with the Class A shares.
The fact that Khosla still owns stock worth more than $125 million, more than two years after the IPO, suggests to me that it feels the best is yet to come.
On April 1, Khosla’s shares were trading at $84. By the end of July, they’d hit a 52-week and all-time high of $141.85. In the six weeks since OKTA’s retreated 27% from its high.
If you own OKTA stock, I would continue to hold as long as Khosla has skin in the game.
As soon as it exits its position, you might want to do the same.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.