On a broader level, Okta (NASDAQ:OKTA) should be one of the few names that responds positively to the coronavirus from China. As a specialist in the access management space, Okta stock naturally benefits from necessary security protocols in the digitalization era. But with an outbreak that is on the verge of a pandemic, access management has never been more critical.
As we saw in China, the government imposed severe restrictions on their citizens’ movements. For instance, the most infected cities were locked down. Further, evidence indicates that Chinese officials forcibly quarantined people suspected of having the virus. To justify these aggressive – and some might say egregious – actions, officials referred to the outbreak as a “wartime condition.”
Now, I don’t want to get into a debate about whether China’s actions were merited. Suffice to say, though, any effective containment protocol will necessarily involve identity and access management; otherwise, how are you supposed to know definitively who’s sick, who’s not, and who’s cured? This underlying demand – which the coronavirus accentuated – has driven the long-term case for Okta stock.
Unfortunately, that didn’t stop shares from getting gutted recently. Though Okta stock gained nearly 4% in the midweek session, it has slipped more than 8% from this year’s closing high of $139.50. Likely, the access management narrative, though compelling, is just too broad right now.
And that’s really how investors should regard Okta stock. Once the coronavirus fades into the rear-view mirror, shares will likely resume their upside trajectory. With digitalization taking over almost every aspect of society, security mechanisms will assume greater precedence.
In the meantime, caution is the word of the day (and week and perhaps month).
Okta Stock Is a Risk-on Name in a Risk-off Market
My pensiveness on buying the discount on Okta stock comes down to a very simple thesis: OKTA is a risk-on investment in a market that will likely become risk-off.
Like other burgeoning technology companies, OKTA is optimized for a bullish environment. Think a Ferrari (NYSE:RACE) exotic car running on a smooth race course, like the Circuit of the Americas. If you wanted to do off-roading, you’d take a different car.
And that’s the situation we have here. I don’t think anyone’s saying that OKTA is a bad company. However, it is a growth stock. Thus, management has eschewed immediate profitability concerns for expansionary strategies. That’s fine in a bull market, but a bearish phase will take the wind out of the organization’s sales.
I’ll be remiss not to mention that President Donald Trump declared that the U.S. is more than ready to handle the coronavirus. I think he’s wrong. Moreover, I believe investors should think cynically about his intentions. With the Democratic campaign trail a complete mess, Trump felt emboldened about a second term. But the coronavirus threatens to undermine his central battle cry: the economy.
Even if Trump’s statements weren’t political, his reassurances fall flat against the facts. Just as I’m writing this, the San Francisco Chronicle has reported the first coronavirus case of unknown origin in the U.S. The Centers for Disease Control and Prevention confirmed the case, noting that the patient did not travel to a foreign country nor had contact with an infected person.
As we’re presently witnessing with the escalating crises in South Korea and Italy, this virus infects quickly and mercilessly. It’s only a matter of time when the coronavirus is in our backyard. You can bet this possibility hasn’t been priced into Okta stock yet.
We’ve Got to Get Real
I’m a contrarian at heart. But I’m also a realist. And realistically, Okta stock – and most other risk-on names – face more downside risk in the near term than upside potential.
In January and up until mid-February, several journalists encouraged us to put the coronavirus into perspective. Primarily, the flu infects and kills more people than the coronavirus has globally. I was willing to extend this idea more credibility, until we discovered evidence that the virus transmits asymptomatically.
Basically, this means that infected people can spread the disease despite not having symptoms. Thus, we could be sitting on a viral timebomb without truly appreciating it. The San Francisco case further highlights this reality, as do cases in Germany which have no known origin.
Honestly, I wouldn’t play around. I hope I’m wrong, but the only comparison that might be accurate at this point is the Spanish flu. Either way, investors simply don’t have the appetite for high-growth stocks like OKTA.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.