Is Okta's 15% Price Drop A Buying Opportunity?

Forbes

2 days ago

CHONGQING, CHINA - MAY 25: In this photo illustration, the logo of Okta, Inc. is displayed on a ... More smartphone screen, with the latest stock market chart of the company in the background, reflecting investor sentiment and recent trading activity, on May 25, 2025, in Chongqing, China. (Photo Illustration by)
Cybersecurity firm Okta (NASDAQ: OKTA), a frontrunner in identity and access management, has experienced a stock decrease of around 10% in the last month, even after reporting robust first-quarter earnings that surpassed analyst forecasts. This decline is primarily linked to ongoing economic uncertainties arising from tariffs. Nonetheless, with a year-to-date increase of nearly 30%, Okta's stock offers an appealing opportunity for investors. See Buy or Sell Okta Stock?
Okta's Q1 revenue grew 12% year-over-year (y-o-y) to $688 million, exceeding its previous forecast of $678 million to $680 million. The company's subscription revenue also increased 12% to $673 million, while adjusted EPS rose 24% y-o-y to $0.86. Importantly, Okta reported positive free cash flow of $238 million for the quarter, marking an 11% year-over-year growth. It is important to highlight that the net dollar retention rate was at 106%, down from 111% a year prior and 117% two years back. However, the company experienced growth in its high-value customer segment, with clients holding annual contract values (ACVs) over $100k rising by 7% to 4,870, and those with ACVs exceeding $1 million increasing by 20% y-o-y.
Okta has maintained its fiscal 2026 revenue forecast of $2.85 billion to $2.86 billion, reflecting 9-10% growth. Additionally, it has revised its adjusted EPS outlook to $3.23-$3.28. For Q2, the company is projecting a revenue growth of 10% to $710-$712 million, with adjusted EPS of $0.83-$0.84.
The overall cybersecurity market is anticipated to grow robustly, with investments projected to surpass $298 billion annually by 2028. Okta's identity management platform continues to be essential for securing access across different applications, especially as companies increasingly embrace cloud-based solutions. Management has underscored strong demand for newer offerings, such as Identity Governance and Privileged Access, and is proactive in tackling the rising security challenges associated with AI agents and non-human identities.
With a market capitalization of $17 billion and a price-to-sales (P/S) ratio of approximately 6x based on analysts' estimates for fiscal 2026 revenue, Okta is reasonably valued in comparison with other prominent cybersecurity stocks. However, trading at 25 times its trailing free cash flow, Okta stock seems somewhat pricey, considering its low-teens revenue and FCF growth.
In conclusion, Okta's recent stock downturn offers both opportunities and challenges for investors. While the company's strong Q1 results and growth prospects are encouraging, valuation concerns and decelerating growth rates call for caution. As with any investment, it is crucial to evaluate the advantages and disadvantages thoroughly while contemplating diversified options to reduce risk. The Trefis High Quality (HQ) Portfolio, containing 30 stocks, has a history of consistently outperforming the S&P 500 over the past 4 years. What accounts for that? In aggregate, HQ Portfolio stocks have yielded better returns with lesser risk compared to the benchmark index, resulting in a more stable investment experience, as illustrated in HQ Portfolio performance metrics.
It is also important to recognize that stocks can decline considerably – 20%, 30%, or even 50% –as we've observed during previous market shocks. No stock is immune. Our dashboard How Low Can Stocks Go During A Market Crash illustrates how key stocks performed during and after the last six market crashes.