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Stock Market News: Software-as-a-Service Stocks Diverge as Okta Soars, Nutanix Plunges

By Dan Caplinger – May 31, 2019 at 11:00AM

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The market fell sharply on Friday morning.

Friday morning was another downer for investors, as the latest U.S. move on the trade front once again disappointed market participants who had wanted to see a less confrontational resolution to disputes with key trading partners. News that importers would have to start paying 5% tariffs on Mexican goods early next month brought a new escalation to concerns within the Americas, only adding to tensions caused by similar aggressions against China. As of 11:40 a.m. EDT, the Dow Jones Industrial Average (^DJI -1.71%) was down 198 points to 24,972. The S&P 500 (^GSPC -1.51%) dropped 24 points to 2,765, and the Nasdaq Composite (^IXIC -1.51%) fell 63 points to 7,505.

Many investors have sought refuge in companies that offer software platforms as a subscription service rather than through one-time licensing fees. Known as software-as-a-service (SaaS) stocks, these companies have built recurring revenue streams that have grown quickly as demand for data analytics and cloud computing applications has rocketed higher. Yet even though the latest results from Okta (OKTA 0.12%) confirmed the upside that SaaS stocks have, poor performance from Nutanix (NTNX -1.37%) showed some of the dangers involved.

Okta passes the test

Shares of Okta jumped 12% after the provider of cloud-based identity services reported its first-quarter financial results. Okta said that revenue soared nearly 50% from year-ago levels, with an even larger increase in the number of clients it has doing at least $100,000 in annual business with the company.

Okta logo in blue and gray.

Image source: Okta.

Okta is cashing in on the fact that large enterprise customers have seen the need to secure their digital assets by being able to verify identification of appropriate users. In particular, as the amount of data that businesses collect on their customers rises, ensuring that only those employees within an organization who should have access actually do have that access has become of paramount importance. Okta is keeping up with changing trends and new demand by coming out with a constant flow of new products to address concerns and stay on the cutting edge of the industry.

In addition, Okta boosted its guidance for 2019, with higher top-line growth projections and a somewhat narrower loss. Investors shouldn't expect the company to post a profit anytime soon, but the client base it's building along with the superior products it's developing are adding up to a huge long-term opportunity that Okta's shareholders hope will lead to further gains.

Nutanix suffers growing pains

Meanwhile, shares of Nutanix plunged 16% after the release of its own financials. The storage software specialist suffered an abrupt halt to its revenue growth in its fiscal third quarter, and investors are having to adjust to diminished expectations for the remainder of the year and potentially beyond.

Nutanix said that revenue actually fell from year-ago levels, with adjusted net losses tripling over the same period. CEO Dheeraj Pandey cited the company's transition toward a recurring revenue business model as the primary drag on results, pointing to a 17% rise in software and support revenue as a sign that the strategic move is underway and should pay off in the long run. In particular, subscription revenue more than doubled from year-ago levels, and Nutanix has continued to do well in boosting the size of its customer base and signing major deals with key clients.

Yet investors aren't sold on the idea that Nutanix will be able to solve everything by shifting to recurring revenue. Just a couple days ago, Wall Street analysts at Morgan Stanley pointed to an overly ambitious time frame for Nutanix to turn things around, suggesting that shareholders would likely be disappointed with the slower pace of an eventual recovery.

Many SaaS stocks have done well recently, but growth remains a key ingredient for success. Without growth, many investors lose patience with the inevitable losses and uncertain prospects for SaaS businesses down the line. As long as there are enough high-performing SaaS stocks, it's likely that investors who like the space will gravitate toward the winners.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Okta. The Motley Fool recommends Nutanix. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Nutanix Stock Quote
$20.83 (-1.37%) $0.29
Okta Stock Quote
$56.87 (0.12%) $0.07
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$28,725.51 (-1.71%) $-500.10
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,585.62 (-1.51%) $-54.85
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,575.62 (-1.51%) $-161.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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