Back in early October, I argued that the gains in the Okta (NASDAQ:OKTA) stock price looked like a ‘dead cat bounce.’ Pushed in part by an analyst downgrade, OKTA stock would fall soon after.
OKTA quickly recovered — and indeed surpassed those early October levels. A recent rally puts the stock back at a ten-week high.
Still, I’m not ready to back off my bearishness just yet. Admittedly, Okta still has a huge long-term opportunity in authentication, and room to expand its product portfolio.
But the valuation concerns that underpinned my caution toward OKTA in October haven’t gone anywhere. Indeed, with earnings on the way in early December, those concerns even more pressing.
OKTA Stock Priced for Perfection
OKTA has a market capitalization near $14 billion. Net cash, including a recent $1 billion issuance of convertible notes, is a little under $300 million, suggesting an enterprise value around $13.7 billion.
Meanwhile, after the second quarter, Okta guided for full-year revenue of $560-$563 million. Even assuming the company tops its post-Q2 outlook, OKTA is trading at an enterprise value to revenue multiple in the range of 24x.
That bears repeating. OKTA stock trades at 24x revenue, not 24x earnings. Among stocks with a market capitalization over $10 billion, there are only a handful of tech names with a similar valuation: Zoom Video Communications (NASDAQ:ZM), DataDog (NASDAQ:DDOG), CrowdStrike (NASDAQ:CRWD), Shopify (NYSE:SHOP), and Slack Technologies (NYSE:WORK). That grouping seems a risk at the moment.
Growth Stock Worries
The worry is that none of those names, with one exception, have performed that well of late. ZM stock gave back nearly all of its post-IPO gains, declining over 40% before a recent bounce.
SHOP is 20% off its highs and sold off after solid Q3 earnings late last month. CRWD lost half of its value in barely two months. WORK has been in an almost permanent downtrend since its direct offering in June.
For the past few years, as I’ve written several times of late, investors were better off focusing on growth potential over valuation. The declines in the market’s dearest-valued stocks, at least on a revenue basis, show that’s no longer the case. Valuation matters again.
And that seems a potential risk for OKTA stock ahead of earnings. It’s a recipe for a beat-and-raise quarter, which Okta may well deliver next month, to lead to a declining share price anyhow. And it leaves almost no room for anything less impressive, particularly for a stock that still trades over 600% above its initial public offering price of $17.
The Case for OKTA Stock
To be fair, it may be that the sell-off in growth stocks is fading. Several of OKTA’s peers (at least in terms of valuation) have bounced. And DDOG stock actually soared after earnings last week, gaining 17% and returning to post-earnings highs.
The hope here would be that the OKTA follows a similar playbook. A post-earnings bounce could target the $140 levels at which shares traded in late July. Coincidentally or not, a return to those highs would be a 17% gain — right in line with what DDOG delivered last week.
But even those gains rely on the market’s perception of earnings, not necessarily earnings themselves. Okta not only needs to deliver a big third-quarter report but needs investors to be receptive to paying 24x sales for any stock no matter how impressive the revenue growth.
That still seems like a lot to ask for — and at the least implies that pretty much everything has to go right for Okta into, and out of, the Q3 report.
As of this writing, Vince Martin has no positions in any securities mentioned.
