Okta Earnings: Macro Headwinds Continue to Impact Sales Motion Even as Profitability Grows

Key Morningstar Metrics for Okta

• Fair Value Estimate: $100.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Okta’s Earnings

We are maintaining our fair value estimate of $100 per share for Okta OKTA after the firm reported solid second-quarter results and raised its full-year guidance. Broad-based strength in revenue and profitability exceeded our estimates, but behind this rosy picture, we saw weaknesses in customer additions and sentiment. Considering the broader picture, the macroeconomic environment continues to pressure the business, with continued scrutiny surrounding last year’s security breach still keeping investors cautious. With shares dipping after hours, we view Okta as modestly undervalued.

Total revenue reached $646 million, marking a 16% year-over-year increase. Strong spending from large enterprises continued to drive top-line performance. Customers spending more than $100,000 annually grew 10% over the year to 4,620, and those spending more than $1 million annually represent the fastest-growing cohort. Additionally, we see some signs of recovery in its go-to-market strategy as the firm refocuses on boosting new logo acquisitions and existing customer expansion after its poorly executed Auth0 acquisition.

With the stock trading down after hours, we believe investors were underwhelmed by management’s commentary on the firm’s business pipeline. The growth rate of Okta’s cRPO (a measure representing the firm’s backlog that it expects to recognize as sales in the next 12 months) decelerated to 13%, down from 15% last quarter and 18% a year ago.

The continued decline in the firm’s net retention rate (a measure of Okta’s ability to upsell existing customers) also likely spooked investors, with Okta’s second-quarter NRR coming in at 110%, down 500 basis points year over year. While we still view Okta as a solid long-term winner in the identity space, the near-term headwinds could potentially depress top-line growth in the coming quarters.