The Truth Behind Okta Stock: What You Need To Know

Okta stock: Okta stock was flying high in October, but it has fallen fast and hard since. Shares dipped 23% after Q3 earnings were released on Nov 7.

The data management company reported that its EPS fell from $0.85 to $0.66 on a year-over-year basis, falling short of analyst expectations of $0.70.
Okta stock has continued to drop so far this month, falling another 10% after the company announced it was exploring strategic alternatives, including a potential sale of the business.

As is often the case with stocks whose prices rise strongly, many investors appear to be quite confused about what’s going on with Okta stock right now and where it might be headed in the future.

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The Truth Behind Okta Stock: What You Need To Know

‍Okta stock was one of the top performers in the fourth quarter of 2018, with shares rising by more than 50% after an impressive Q4 earnings report. Thanks to that, Okta has now seen its share price more than triple since its initial public offering (IPO) in July. With so much momentum behind this stock, inquiring minds might be asking: Is Okta a good investment? Or is it too late to buy Okta stock? Let’s take a closer look at this fast-growing technology company and see if its potential is worth investing in for the long term.

What is Okta?

Okta is a technology company that helps businesses manage their access control. More specifically, Okta provides cloud-based identity management solutions for managing employee access to corporate networks and applications. Founded in 2012, Okta has grown from a 20-person startup to a publicly traded company with more than 1,000 employees, a market capitalization of more than $7 billion, and 2018 revenues of more than $400 million. Okta’s customers include some of the world’s biggest technology companies, including Amazon, Box, Cisco, Dropbox, Facebook, Google, Salesforce, Microsoft, Oath, and VMware.

Why the sudden surge in Okta stock?

Okta stock has had an incredibly strong run this year, rising by more than 330% year-to-date as of December 26. While the stock’s climb has been impressive, it’s not hard to see why investors are so bullish on Okta. First and foremost, Okta is riding the wave of the cloud computing industry’s growth. And as more and more companies shift their IT infrastructure to cloud-based solutions, Okta is there to meet the demand for identity management systems. In addition to this macro tailwind, Okta also saw its stock get a boost from the company’s stellar Q4 earnings report.

Who’s buying Okta stock?

While Okta has seen its share price soar, many of its investors are actually hedge funds and other short-term traders. In fact, Okta is one of the most heavily shorted stocks in the S&P 500, with 29% of its shares sold short. These short sellers may be betting that the stock’s high valuation will lead to disappointing results in the future. That being said, the stock’s strong performance is also drawing in long-term investors. Indeed, Okta currently has a Zacks Rank #2 (Buy) and an S&P 500 4-Star rating as of December 26. For long-term investors interested in Okta as a long-term investment, this massive short interest may present an opportunity. Indeed, while short sellers may be right in the short term, they may be forced to cover their positions in the long term, pushing up Okta’s share price.

The Truth About Okta’s Financials

Okta has had an incredibly successful IPO, growing from 20 employees to over 1,000 and seeing its revenue grow from $20 million to $400 million over a five-year span. Many analysts, however, are less bullish on the company’s financial prospects. Indeed, Okta’s revenue is growing fast, but it has yet to turn a profit. While many companies prioritize revenue growth over profit, Okta’s high valuation makes it hard to justify this approach. Indeed, Okta currently trades at a sky-high price-to-earnings ratio of 57. This high PE ratio may be justified if Okta can continue growing its revenue at a rapid rate, but it can also lead to big losses for investors if the company fails to turn a profit.

Key takeaway

Okta has seen its share price rise dramatically this year thanks to the rise of cloud computing, the company’s strong revenue growth, and investor optimism about the company’s future. That being said, Okta has yet to turn a profit, and its high valuation makes it hard to justify this valuation. In addition to this, Okta is heavily shorted, with many investors betting that the stock will crash. If you are interested in investing in Okta as a long-term play, you may want to wait for the short hype to die down before you buy.