Okta Reversal In Progress While Catalysts Approach

Shares of Okta NASDAQ: OKTA are down from their peaks along with most of the rest of the cyber-security industry, but a bottom is in progress, and a reversal is at hand. Not only is the upcoming earnings report an opportunity for outperformance but there is a devil in the details regarding the analysts’ sentiment that hides that opportunity from investors.

The takeaway is that Okta’s sentiment and price target are firming rapidly ahead of the upcoming report, which isn’t coming through in the consensus figures. Investors who take a chance now are likely rewarded later when the results confirm the data in the analyst's sentiment. 

Marketbeat.com’s analyst tracking tools have the sentiment pegged at Moderate Buy with a price target of $86.71. That’s about 12% above the current price action but is well below the most recent activity. The reason is that “current” ratings are up to 1 year old, and the low price target of $45 falls within that range.

The company has received at least 22 fresh commentaries since the last earnings report, and all included a price target increase, and there were a few upgrades as well. Baird analyst Shrenik Kothari told clients the company’s go-to-market strategy and execution have it set up to exceed guidance. 

The broad consensus, which includes the $45 target, is about double the low, but the most recent consensus has the stock trading another 15% above that, near $100. The high price target is another 20% above that. Because the low price target will fall out of the data set soon, the price target and sentiment will firm even without the upcoming earnings release and provide a potential catalyst. 

There Are 3 Potential Catalysts In The Earnings report 

Okta is expected to report Q1 earnings in mid-May, and there are 3 potential catalysts: revenue growth and earnings. The company guided revenue to a range near $511 million for the quarter, which is what the analysts expect. The potential catalyst is that revenue might easily top this figure, given the company’s growth trajectory and history of outperformance.

Not only does Okta tend to beat the analysts' consensus by 400 to 500 basis points, but the trajectory of growth is much steeper than the 23% YOY gain implied by the guidance. Okta has demonstrated an ability to gain customers and deepen penetration which is a double tailwind for revenue. 

The 2nd catalyst is the earnings. Okta is expected to post a GAAP loss as it has been doing, but adjusted profits are on the table. The opportunity is that revenue strength and operating leverage will combine to drive above-consensus results, but the guidance is the real opportunity. It won’t matter how strong the results are if the strength does not carry into the guidance.

Solid results that lead to an improved outlook will be a game changer for this market. As it is, the company is guiding for 17% revenue growth in 2023 compared to a 40% pace in 2022. 

Institutional Tides Are Turning 

The institutions have been heavy sellers of Okta over the last 5 to 6 quarters, which is unsurprising given the stock’s quadruple-digit gains. However, that trend ended in Q4 2022 and although the activity is light, the institutions are buying again. They own about 73% of the company and represent a solid support base. 

The chart echoes those of other security companies and shows a Head & Shoulders bottom. The bottom isn’t complete, but the right shoulder is forming ahead of the earnings report. The question is if the report will get the market above the neckline at $105/$107, in which case a complete reversal and rally may form.