Okta stock snags double upgrade to buy after analyst sees 'path' to 12-month outperformance

By Wallace Witkowski

Goldman Sachs cut Okta to a sell rating on Valentine's Day

Okta Inc. shares closed Monday with a modest gain after the identity-management software company scored a double upgrade ahead of earnings following a downgrade of the stock six months ago.

Okta (OKTA) shares rose 1.2% to $72.26 on Monday after Goldman Sachs analyst Gabriela Borges upgraded the stock two notches to a buy rating from a sell, now that she sees a favorable risk/reward ratio with subscription revenue likely to trough in the second half of the year.

Borges issued the upgrade now that she sees a path to 12-month outperformance, driven by contracted subscription revenue that is expected to be recognized over that time, and an acceleration back to 15% to 20% growth in annual recurring revenue, or ARR, a metric often used by software-as-a-service companies to show how much revenue the company can expect based on subscriptions.

Borges also said Okta is approaching anniversary headwinds in its customer identity-access management business tied to its acquisition and rough integration of identity-platform Auth0 (pronounced "Auth Zero"), which is more focused on direct-to-user sales than Okta's corporate focus.

"Okta ramps on cross-sell tied to new product cycles such as [Identity Governance and Administration] and [Privileged Access Management]," Borges said. "While we believe competition from Microsoft (MSFT) will remain an overhang on the stock, we reflect this in our bull case scenario by continuing to discount Okta's multiple by 30% relative to peers."

Read from June:Microsoft cybersecurity expansion poses long-term 'ramifications' for Palo Alto Networks, Cloudflare, others

Since being added to Goldman's sell list on Feb. 14, Okta is down about 8% versus a 14% gain by the Nasdaq Composite COMP and a 3% gain by the WisdomTree Cloud Computing Fund WCLD, Borges noted. Year to date, Okta shares are up almost 6%, while the Nasdaq is up 32% and the WCLD fund is up 25%.

Of the 42 analysts who cover Okta, 26 have buy-grade ratings, 13 have hold ratings, and three have sell ratings, along with an average price target of $93.24, according to FactSet data.

Okta is scheduled to report earnings on Aug. 30. after the close of markets.

Read: George Soros loads up on AI chip makers Nvidia and AMD while selling Salesforce and Snowflake shares

Recently, billionaire investor George Soros reported that he increased his stake in Okta along with cybersecurity stocks Cloudflare Inc. (NET) and Rapid7 Inc. (RPD), and took new positions in Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD).

Read: Nvidia rallies more than 5% as Morgan Stanley cheers a buying opportunity

Last quarter, Okta Chief Executive Todd McKinnon told MarketWatch that even with an increased annual forecast, he saw a tougher business environment ahead. where "the macro condition could get worse." Back in November, Okta forecast a profit for all of 2023.

-Wallace Witkowski

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-15-23 0758ET

Copyright (c) 2023 Dow Jones & Company, Inc.