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Okta Stock Has Become Too Unpredictable to Buy

Neither valuations nor charts offer clear insight into OKTA

Is Okta (NASDAQ:OKTA) stock finally recovering from its summer slump? Many investors may wonder that as OKTA has moved steadily higher over the last month. Despite a high valuation, consumers and traders alike have responded well to its identity cloud offering that provides one login to multiple sites.

Okta Stock Has Become Too Unpredictable to Buy
Source: Shutterstock

As a company, I expect Okta to enjoy continued success. However, as an equity, OKTA has moved well ahead of any reasonable multiple. With the OKTA stock price defying any valuation or chart logic, investors should go into this with speculative cash only, if they buy at all.

OKTA Has Become Overvalued

Okta’s identity cloud is genius, as all of us have grown tired of having to memorize more passwords. That popularity has helped drive OKTA’s stock price to a record of $141.85 per share earlier this year. That came down in a selloff late in the summer. In recent weeks, a recovery has begun. After hitting a near-term low of just under $100 per share in late September, it has seen a return to the $115 per share level.

Will it continue to move higher? Perhaps. However, the problem with OKTA stock is that it has become the stereotypical overvalued cloud equity. Much like Twilio (NYSE:TWLO) or salesforce (NYSE:CRM), the price has moved well ahead of any fundamentals. Since it trades at a price-to-sales (P/S) ratio of around 28.4, financials have become useless at predicting this stock’s behavior.

This is not to say I hate OKTA stock. I think it offers real value, and I believe it will trade at higher levels ten years from now. Moreover, with revenue growth forecasted at 41% in fiscal 2020 and 30.7% in the next fiscal year, I see it maintaining an elevated multiple for years to come. However, at its current P/S ratio, I think the price has moved well ahead of itself.

Charts Offer Little Help

What traders may find most frustrating is that the charts offer no help. Twice in the last six weeks, OKTA stock spent about a week trading below the 200-day moving average (MA). However, just as traders might assume that the 200-day MA floor had broken, it shoots higher. Moreover, after topping out close to the 50-day MA in early October, OKTA has now broken through that price ceiling.

okta stock price chart

Given the behavior of the charts, traders will assume that the stock will head higher. They could be right. However, the charts have not proven trustworthy with OKTA stock. In the end, the only reason traders have is a belief that it will continue to move higher.

Should sentiment turn negative, the stock could see a considerable decline. A highly negative market could take it back to $25 per share, a level it saw at the end of 2017.

Given this level of uncertainty, OKTA looks more concerning than it does interesting. For now, I expect more speculative bets in OKTA stock. However, speculative is the key word here. At current valuations, this equity is not appropriate for conservative investors or retirement funds.

Final Thoughts On OKTA Stock

OKTA’s valuation makes it a reasonable buy for speculative investors only. The company has benefited from massive growth. And that development has also boosted its stock price. As consumers and businesses alike take to its identity cloud. The desire for one login will keep revenue growth and the value of OKTA stock high for years to come.

But how high?

The company trades at more than 28 times sales, rendering valuation measurements useless. Moreover, its behavior has made OKTA stock difficult to predict from a chart perspective.

Okta will continue to grow in importance as a cybersecurity stock. This will continue to boost OKTA stock in the coming years. Still, with the equity now moving on unpredictable momentum swings, investors risk either losing money or seeing gains disappear as whimsically as they appeared.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

Article printed from InvestorPlace Media,

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