Okta (OKTA): Buy, Sell, or Hold Post Q1 Earnings?

Okta trades at $100 per share and has stayed right on track with the overall market, gaining 6.1% over the last six months. At the same time, the S&P 500 has returned 5.4%.

Is now the time to buy Okta, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Okta Not Exciting?

We're swiping left on Okta for now. Here are three reasons why you should be careful with OKTA and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Okta’s billings came in at $552 million in Q1, and over the last four quarters, its year-on-year growth averaged 9.9%. This performance slightly lagged the sector and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Okta’s revenue to rise by 9%, a deceleration versus This projection doesn't excite us and suggests its products and services will face some demand challenges.

3. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Okta’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 28.1% for the last 12 months will decrease to 26.9%.

Final Judgment

Okta isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 6.2× forward price-to-sales (or $100 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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