Okta's Growth Looks Rosy, But Valuation Concerns Remain: Analyst

Okta's stock fell Friday despite a strong sales outlook, signaling high expectations for the fast-growing cloud stock.
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Okta's business is on the up and up, but investors should be cautious of lofty expectations according to one analyst.

The cloud software firm topped second-quarter sales expectations and raised its outlook for the current quarter and full year, despite economic uncertainty. But Okta's  (OKTA) - Get Report stock fell nonetheless on Friday, closing 4.8% lower at $207.98.

In a note on Friday, Mizuho Securities analyst Gregg Moskovitz noted a number of good signs in Okta's earnings release: COVID-19's impact on their business was "more mild than expected," he said, its customer identity products grew 72% year-over-year, and Okta also "impressively" added 550 new customers in the quarter.

That added up to revenue of $200.4 million, up 43% year-over-year and well ahead of consensus estimates of $186.3 million. Okta raised its sales guidance for the third quarter to between $202 million and $203 million; for the full year, it expects $800 million to $803 million in revenue, above Wall Street's estimates.

Moskovitz raised his price target for Okta shares to $215 from $200, but reaffirmed a Neutral rating.

"We remain bullish on continued strong growth at OKTA," he wrote. "Having said that, investor expectations are very lofty, and with OKTA now trading at 31x 2021 EV/Sales [enterprise value to sales], we believe additional upside potential appears limited."

Okta's market cap sits at about $26 billion, and has risen 77% year to date on bullish sentiment from investors and potential tailwinds from the work-from-home environment.

Okta's products cut across workforce management, security and customer interactions, and the good appears to outweigh the bad in terms of the impact of COVID-19 on the business.

On a call with shareholders, Okta management noted that billings and RPO (remaining performance obligation) growth could be impacted by a challenging small business environment in the second half. But growing interest in cloud software, digital transformation, and zero-trust security implementations could also boost results the months to come, they said.