As long as you’re using a very small portion of your trading account, respecting your stop-losses, and able to handle the risks involved, it might be okay to bet on a lesser-known investment like Okta (NASDAQ:OKTA), but Okta stock comes with a lot of baggage.
I’m not against taking on some riskier investments, and Okta certainly fits into that category. The company specializes in security solutions and identity protection with a cloud-storage angle; this sounds promising on the surface, but a deeper dive will reveal some potential issues with OKTA stock.
What Scares Me About OKTA Stock
You may have noticed that the stock market is currently undergoing a rotation from momentum stocks (the “momo” stocks, as some folks call them) into value stocks. I’ve heard a few commentators claim that that’s a signal of a weakening bull market, but that’s debatable.
In any case, the momo-to-value rotation tends to hit technology stocks the hardest, and especially the high flyers that have experienced a steep ascent in price. Okta Inc. stock indubitably fits that description: it’s a cloud-focused company steeped in technology, and OKTA stock’s price action looks like a meteorite that went too close to the sun.
It’s a rather unsettling arc, somewhat reminiscent of what traders previously witnessed with other cloud-centered stocks like Twilio (NYSE:TWLO) and Slack (NYSE:WORK) but more pronounced. Put it this way: the movement from OKTA’s $17 IPO price to its all-time high of $141.85, and then the retracement back to $103, isn’t exactly what I look for in a potential investment.
Too far, too fast. That’s my immediate thought when I look at Okta Inc. stock, and even in my most risk-on moods, I’m not one to catch a falling knife. Besides, with the broader market moving away from the “momos” and seeking shelter in older, safer companies, I’ll be glad to watch OKTA but I sure as heck ain’t gonna chase it.
When Bad News Is Good News
Turning our attention to earnings, some folks might point to the apparently great results from Okta’s second-quarter earnings announcement. Evidently, the bar was set so low that an earnings beat was almost inevitable; indeed, the market cheered as the announced loss of 5 cents per share beat analysts’ expectations.
Even with that, I still see a loss and “not as bad as we thought it would be” simply doesn’t cut it for me. In a similar vein, Okta reported operating losses totaling 31% of sales, which is an improvement over the 41%-of-sales operating losses from last year, but is still not confidence-inspiring if you ask me.
Given those losses, you’d think that some retrenchment would be in order; to the contrary, however, it appears that Okta has actually ramped up its spending. Year-over-year, the company has increased its employee count by 40%, and Okta’s operating expenses have increased dramatically from $105 million to $145 million.
It’s one thing to be ambitious; it’s another matter entirely when a small company accelerates its spending when it should be focusing on its operating losses, an issue you can’t spend your way out of.
If the market wants to construe Okta’s earnings results as good news, that’s the market’s prerogative; as an independent thinker and investor, I’ll pass on this cloud-computing upstart until I see a more disciplined approach to long-term growth.
The Takeaway on Okta Stock
I have to give credit to InvestorPlace’s own James Brumley for summing up OKTA’s valuation problem: the price-to-sales ratio is 2.2 – far above average – and OKTA is currently trading at 25.7 times its trailing sales.
Those numbers alone are enough to scare me away from taking a position in Okta Inc. stock.
Sure, the OKTA could still go up in the short-term; markets can be irrational and unpredictable, as we should all know by now. Nonetheless, I’m perfectly content to sit on the sidelines, hoping that OKTA shareholders prosper but not convinced that they’re likely to.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.