We rate Okta at Buy On Fundamentals, Stock Chart (OKTA)

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The sous chef has already rolled

Okta (OKTA) is one of a small group of large-scale identity management software vendors. This is a critical category within enterprise software in general and cybersecurity in particular. As system complexity increases in the enterprise, and even in retail applications, the more difficult it is to know precisely who is accessing which systems on which device and with which permissions. The threat is ahead of systems management here and so you see strong growth in names like OKTA, ForgeRock (FORG), SailPoint Technologies (NYSE: SAIL) And so on. We’ve made money from personal staff accounts with OKTA in the past, but bailed out a while ago – this note explains why, but essentially both recognized revenue growth (important in all reports ) and growth in remaining performance obligations (RPO) (total business contracts – in SEC reports but you have to go get it!) were slowing.

It was a good call.

Source: Alpha Research

Okta’s struggles peaked in their first quarter (ending April 30, 2021) eearnings call, in which the company reported difficulties in its more than $7 billion acquisition of Auth0 and the departure of the chief financial officera departure not unrelated in our opinion.

Difficulties in acquisition concern us, because where there is one, there may be more. OKTA’s inability to properly calculate deferred revenue from Auth0 – that was the problem, it doesn’t seem like much, but it’s something because it affects both the reality of cash balances on the balance sheet and the future amount of revenue that can be recognized with certainty – could be the first in a number of due diligence issues arising from an expensive acquisition. We won’t know until more earnings reports come through – for now, it’s just a risk we’re aware of.

In our Q2 earnings report within our Seeking Alpha Marketplace service, Growth Investor Pro, we declared OKTA at Neutral at that time on fundamentals, but noted a bullish chart. This trend has continued. We are willing to trust the chart as we head into the third quarter results (ending October 31, 2021) and have thus opened a small new position in personal staff accounts. Not a full allowance – because we’re still concerned about service-related acquisition issues, but a meaningful allowance. We take comfort in the fact that this company has more RPO based on TTM revenue than any other stock we cover – its contract backlog is more than 2x TTM revenue, and it is growing faster than TTM revenue, which we think of it as something of an insurance policy against the risks of short-term gain.

We are now rating Okta at Buy.

Here are the numbers.

Source: Company SEC Filings, YCharts.com, Cestrian Analysis

Source: Company SEC Filings, YCharts.com, Cestrian Analysis

And now for the graphics.

classic AT

This chart looks simple to us – increasing consolidation, any +ve catalyst can push the stock up through this upper resistance line. So a good third quarter earnings report could do wonders; a bad one, likely to find support around the $225 level; a terrible, broken bracket.

Source: Barchart.com, Cestrian analysis

Elliott Wave

Here’s what we think is a relatively cautious medium-term outlook for the stock.

Source: TradingView, Cestrian analysis

Let’s call the 2020 surge of COVID low a wave 1; say the next wave 2 bottomed out at the 0.5 retracement of that low; and let’s say if the classic chart above that you see – with the consolidation pattern that we think may break higher – we believe it may result in a wave 3 to the upside. This wave 3 is obviously not happening on the wave chart yet. But our best guess – based on fundamentals and based on the classic chart – is that the stock will rise soon. And if we think a fairly unexciting target is around $399/share – that’s about the length of wave 1 placed at the wave 2 low, a conservative target for a wave 3 – c t is also the 0.5 extension of wave 1 which is very conservative as a target for wave 3. We then postulate a correction of wave 4, coming back around the 0.5 retracement of this wave 3, which corresponds to being just above the top of wave 1 – then starting again on a final wave 5. Of course, this is pure speculation based on possible graphics setups – we claim no more. But in our work, we often find that these standard wave patterns and Fibonacci levels can be surprisingly predictive, so our confidence in these tools increases.

All taken together? We’re at Buy on Okta.

Cestrian Capital Research, Inc – November 19, 2021.

Karen J. Nelson