Buy The Dip in Okta, There’s Nothing Wrong With the Outlook

Key Points

• Okta had a solid quarter, but its stock price fell due to cautious guidance. The price decline is a good opportunity to load up on shares.
• Guidance is likely to be cautious due to the strengths shown in Q1 and the hot Q2 forecast; there is potential for guidance increases this year.
• Analysts' responses are mixed but bullish overall for this Buy-rated stock; consensus forecasts a 20% price increase from the May closing price. 

You would think that Okta’s NASDAQ: OKTA FQ1 earnings release was weaker than expected and compounded by poor guidance, the way its stock price fell after its release. Down more than 15% for the week, the only thing wrong with the report is a hint of caution in the full-year guidance.

The full-year guidance was only reaffirmed, despite a solid Q1 performance and hot guidance for Q2.

The outlook assumes slowing growth, which is offset by outperformance in Q1, momentum in the underlying cybersecurity business, and a high likelihood of increasing as the year progresses. 

There were some negative responses from analysts, but the takeaway from the activity is nothing but bullish. The negative revisions have reduced the high-end potential but are mainly to above-consensus price points and are offset by a higher number of price target increases. The net result is that the consensus price target is rising, up 5% in May and 16% year-over-year (YOY) at the start of June, a bullish trend compounded by increasing coverage and firming sentiment. 

The consensus sentiment for this stock is a Moderate Buy, up from last year’s Hold. The single post-release downgrade tracked by MarketBeat, from Moderate Buy to Hold, cites valuation concerns that are not reflected in the revision trend. The bulk of analysts expect this stock to rise at least 20% from the May close, leading to a high-end range of $130 to $140, a nearly 40% gain when reached. 

Okta Growth Slows; Sustains a Double-Digit Pace in 2025 and Healthy Cash Flow

Okta had a solid quarter in Q1. Although top-line growth slowed to 11.5% from last year’s nearly 20% pace, it was sufficient to outpace the consensus estimate by more than 100 basis points. The strength was driven by growth in the core subscription business, which grew by 12% year over year.

Margin news is also solid, with gross and operating margins widening compared to the prior year, driving a record profit. Critical details include the positive cash flow and $238.1 million in free cash flow, which accounts for approximately 34.6% of the revenue. 

The guidance is good despite the cautiousness in the full-year forecasts. The Q2 guide assumes another 10% YOY gain in revenue and may also be cautious due to the 14% increase in current remaining performance obligation (CRPO) and the 21% increase in RPO. Regardless, the full-year outlook also forecasts a roughly 10% gain, sufficient to sustain the company’s cash flow, business growth trajectory, and fortress balance sheet. Highlights at the end of Q1 include a 2.5% increase in shareholder equity and net debt equal to less than 0.2x equity. 

Investors Should Expect Volatility for Okta Stock Price in June

Analysts indicate Okta’s stock price as higher, an outlook supported by institutional activity; however, short interest could be a problem. The short interest wasn’t robust in the mid-May report, but it was elevated at nearly 5%, a long-term high, and had been rising over the preceding few months. With this in play, investors can expect to see short interest rise again in the following report and potentially remain elevated until later in the year.

The catalyst for short-covering will be upcoming earnings releases. 

The price action in OKTA stock is ugly. The market’s 15% decline confirms resistance at a critical level, but it may have already priced in the weakness. At $103, OKTA is still above the crucial support target near a cluster of moving averages that includes the 150-day EMA and the long-term 150-week EMA.

Assuming the market remains above that level, the rebound may begin quickly as the market reversal that began last year gains momentum. If not, this market could fall to $90 or lower before rebounding.