Okta stock falls as Outlook disappoints. Time to buy dip?

Okta (OKTA -3.42%) shares spiraled lower after the cybersecurity company reported solid second-quarter results but offered a disappointing outlook.

On the face of it, the final numbers looked good. Okta’s Q2 revenue rose 16% year-over-year to $646 million, while subscription revenue rose 17% to $632 million. Adjusted earnings per share (EPS) rose from $0.31 a year ago to $0.72. The company guided for revenue growth of 13% to 14% and adjusted EPS of $0.60 to $0.61.

Let’s catch up on the company’s recent results to see if the decline is a buying opportunity.

Solid quarter, poor outlook

Looking ahead, the company’s remaining performance obligations (RPO) rose 16% to $3.51 billion. Its current backlog RPO (cRPO), which is subscription backlog expected to be recognized in the next 12 months, grew 13% to nearly $2 billion. Both figures are based on signed contracts and are indicative of future earnings.

Okta’s net dollar retention rate, which represents revenue from existing customers over the last 12 months, was 110%. That was similar to the 111% it posted last quarter. The company ended the quarter with 19,300 customers, up from 19,100 at the end of Q1. Customers with annual contract values ​​(ACV) over $100,000 reached 4,620, up from 4,550 at the end of Q1.

Management estimated third-quarter fiscal 2025 revenue to be between $648 million and $650 million, representing year-over-year growth of approximately 11% and adjusted EPS of 0.57 to 0.58 dollars. Current subscriptions are looking to grow by about 9% to a range of $1.985 billion to $1.99 billion. Its Q3 cRPO forecast is one area where investors seemed concerned, but that’s not the only area of ​​growth it’s likely to see next year, as it will still be able to sign new deals and has upsell opportunities.

For its full fiscal year, the company estimates revenue between $2.555 billion and $2.565 billion, representing revenue growth of about 13% at the midpoint. Adjusted EPS is expected to be between $2.58 and $2.63. The company previously guided for full-year revenue of $2.53 billion to $2.54 billion and adjusted EPS in the range of $2.35 to $2.40.

This was the second straight quarter Okta raised its guidance, and the second time it wasn’t good enough for investors. The company said it was conservative given the macro environment and the potential impact of last year’s security incident. In 2023, Okta’s customer support system was hacked and data stolen from customers using the system. It wasn’t the best look for a cyber security company.

Still, Okta said there’s a lot of really good stuff happening, and it’s seeing strength with large enterprises. Meanwhile, it is set to introduce a number of new products at its annual Oktane conference in October.

Image source: Getty Images.

Should investors buy the dip?

Following the recent decline in its stock price, Okta is now trading at a forward price-to-sales (P/S) ratio of less than 5. This is well below that of many of its cybersecurity peers, as well as much lower than if it traded before 2022. With slower growth comes a lower multiple, but I don’t think its current valuation reflects the growth it generated.

OKTA PS Ratio data (1 year ago) by YCharts

As such, I think the sale seems overdone. The company has continued to deliver solid results and appears to be taking a very conservative approach with guidance. However, investors have been worried about the company’s growth for some time, and a conservative forecast doesn’t help alleviate those concerns.

First, investors were worried about the impact it was having Microsoft and its group identity solutions with its 365 offering would have Okta. Then investors became concerned about the impact of the security incident. These worries are why the company doesn’t seem to be getting the benefit of the doubt from investors.

However, at Okta’s current valuation and with likely conservative guidance, I think this is a pretty good place to pick up the stock.