Okta: Market Comes to a Boil, Explosive Upside Is Possible

Key Points

• Okta's robust Q2 performance foreshadows strong results in Q3 and Q4, and it is likely to outperform the consensus as of late August.
• Analyst trends are driving this market to long-term highs that may be reached before the end of the year.
• A fresh high will signal a market shift and open the door to a triple-digit upside. 

A technical reversal has been brewing for Okta’s NASDAQ: OKTA stock market for the last two years, and the market has reached a critical inflection point. The Q2 results affirm its position in the cybersecurity universe, including increasing demand, accelerating growth, and improved guidance that will likely be outperformed.

Accelerating growth is a factor because it signals a cycle bottom; Okta’s growth is robust but had slowed to a multiyear low in Q1. The takeaways include outperformance relative to MarketBeat’s reported consensus and improved profitability with GAAP profits and positive free cash flow in the mix. 

Okta Defies Expectations: Grows, Accelerates, and Outperforms in FQ2

Okta had a solid quarter in FQ2, bringing in $728 million in net revenue, representing a nearly 13% increase compared to the same period last year. The strength was driven by a 12% increase in the core subscription business, outperforming the consensus by more than 220 basis points. RPO, the leading indicator of revenue, grew by 18%, suggesting the acceleration will continue in the upcoming quarters. 

The margin news is also substantial. Not only did the company revert to GAAP profitability, but it widened the adjusted operating margin by 500 basis points. The net result is a 36% increase in operating profits and robust free cash flow. The $0.91 adjusted earnings are up by 26% and outpaced by more than 500 bps.

The guidance is somewhat mixed, but its strengths offset its weaknesses. The weakness is seen in the Q3 outlook, which forecasts top-line strength above the consensus, but EPS should align with it. The offsetting detail is the full-year outlook, which includes revenue and earnings forecasts above consensus figures.

The likely outcome is that Q3 and full-year performance will be stronger than predicted.

And there are no red flags on the balance sheet for investors to worry about. The company is well-capitalized, generating positive cash flow in Q2, which is sufficient to increase its cash position and assets while reducing debt and liabilities.

The net result is a 460 basis point improvement in shareholder equity, accompanied by persistently low total leverage, with total liabilities less than 0.5 times the equity. 

Analysts and Institutions Are Driving Okta’s Price Action Higher 

The analyst and institutional trends are bullish for Okta and driving its stock price action in Q3. They include institutions buying at a pace of 2-to-1 versus sellers, a strong tailwind given their ownership of 87% of the stock, as well as an increase in analysts' coverage.

The coverage is up by double digits in the preceding 12 months, with sentiment remaining steady at Moderate Buy, a bullish bias, as 59% of 37 ratings are Buy, and the price target remains unchanged.

The price target is a critical factor, forecasting nearly 30% upside in late August and a return of this market to long-term highs.

The technical action following the release was favorable. The market surged by 5% in premarket trading and opened with a gap. 

The move shows support at critical levels, but it also carries risk. The early move was halted at the 150-day EMA, which could cap gains in calendar Q3.

The mitigating factor is that support remains evident at the 30-day EMA, which serves as a launchpad for short-term traders who can help keep this market moving higher. OKTA stock can move above the 150-day EMA in this scenario and will likely gain bullish momentum when it does.