Although the broader software segment of the tech ecosystem has suffered significant losses this year, Okta’s (NASDAQ:OKTA) surprising third-quarter performance implies that the bottom may be near. This result also aligns with other positive surprises in the sector, sending OKTA stock up more than 20% on Thursday. However, a challenging environment remains, urging caution for prospective investors.
During the prior Q2 disclosure, Okta — which provides identity and access management services — disclosed frictions integrating the sales force of Auth0, a customer-identity software firm the company acquired in May, 2021. However, Okta managed to generate revenue of $481 million in Q3. That blew past the consensus target of $465.3 million. Therefore, fears of a wider pain may have been exaggerated.
On the bottom line, this software provider also beat expectations, posting adjusted EPS at breakeven. This compares favorably to the loss of 7 cents Okta saw the same time last year. Wall Street had also predicted a loss of 24 cents per share for Q3 2022.
Even when other details seemed not too pleasant in the report, OKTA stock was none worse for wear. For instance, per Barron’s, management disclosed that fiscal 2024 revenue growth will “decelerate to 16%-17% against consensus expectations of around 27%.” This downgrade aligns with warnings of corporate-spending cutbacks from other enterprises.
Still, OKTA soared 18% on Thursday’s premarket session. At the time of this writing, shares are up around 24%.
OKTA Stock Still Faces Obstacles Ahead
Adding to the enthusiasm for OKTA stock, human-capital management software firm Workday (NASDAQ:WDAY) also recently delivered a Q3 earnings beat. The implication here is that the software segment may have reached a bottom. For some companies, the abyss may be in the rearview mirror.
Certainly, even the finer details — such as Okta’s positive Q3 operating margin of 0.1% as opposed to expectations for a negative margin of 7.8% — have buoyed sentiment. However, the bigger picture suggests that Okta’s underlying business may still face challenges.
As with Workday, the total addressable market for software providers may diminish if enterprises continue to lay off workers. What’s especially problematic is that the latest round of pink slips impacts white-collar professionals — exactly the segment software providers target.
Further, Okta may encounter competitive challenges from the likes of software giants like Microsoft (NASDAQ:MSFT). To be sure, Okta’s high gross margin of nearly 70% implies potential flexibilities in terms of economies of scale. But Microsoft enjoys a similar gross margin yet features excellent, near-class-leading operating and net margins.
Accordingly, prospective investors of OKTA stock should exercise reasonable caution moving forward. Yes, Okta can fight. But Microsoft and its blue-chip ilk punch harder.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.