Please ensure Javascript is enabled for purposes of website accessibility

Will Okta Continue to Soar When It Reports Its Q2 Earnings?

By Danny Vena – Aug 27, 2019 at 3:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The software-as-a-service company has been growing at a breakneck pace. Can it continue?

In the little more than two years since its initial public offering, Okta (OKTA 1.99%) has been something of a runaway train. The stock of the digital-identity and access-management specialist rose 38% in its first day of trading and never looked back. It has now gained more than 500% since its debut in April 2017, making it among the top stock market performers over the past couple of years.

Investors will be keenly interested to see if the company has maintained its recent growth spurt when Okta is scheduled to report its second-quarter results after the market close on Wednesday, Aug. 28. Let's see what's been driving the stock higher and what to look for when the company reports earnings.

People at a row of desk's working in an office.

Image source: Getty Images.

Strong fundamentals

For its fiscal 2020 first quarter (which ended April 30, 2019), Okta reported revenue of $125 million, up 50% year over year and soaring past the high end of management's guidance, which topped out at $117 million. 

Even more important for the company's future was the increase in subscription revenue to $117.2 million, up 52% year over year. This recurring revenue now represents 94% of total revenue, up from 92% in the prior-year quarter.

Because Okta has been hyper-focused on feeding its soaring growth, the company continues to generate losses. It produced a net loss of $52 million under generally accepted accounting principles (GAAP), resulting in a loss per share of $0.46, worse than a $0.25 loss in the year-ago quarter.

Total revenue performance obligation (RPO) -- or all of the future revenue (billed or unbilled) that Okta had under contract at the end of the first quarter -- was $792 million, up 59% year over year. Current RPO -- or the amount Okta expects to recognize over the coming 12 months -- is $416 million, up 49% versus the prior-year quarter.

Customer retention is also impressive. The dollar-based retention rate over the trailing 12-month period remains strong at 119%, which illustrates that each customer is spending more than it was in the prior period.

The company also continued to increase the number of customers with an annual contract value greater than $100,000. Okta added 104 such customers in the first quarter, even more than it added in the fourth quarter, which has historically been seasonally stronger. During the conference call to discuss the results, CEO Todd McKinnon said that well over half of these additions came from new companies, "providing a clear indication that we're experiencing increased traction landing customers at scale in the enterprise market."

All these factors have played into Okta's surging stock price as investors are banking on the company's excellent performance continuing.

A robust outlook

Investors also got a boost of confidence when Okta raised its full-year guidance based on the strength of its first-quarter results. Management now expects revenue in a range of $543 million to $548 million, an increase of between 36% and 37% year over year, and up from the $532.5 million it forecast at the midpoint of its guidance just three months earlier.

For the second quarter, Okta is guiding for revenue in a range of $130 million to $131 million, which would represent year-over-year growth between 37% and 38%.

Given the company's historical penchant for giving conservative guidance and sailing past it with ease, I wouldn't be surprised to see a similar outcome this quarter.

Considering the strong growth Okta has achieved across a variety of financial and operational metrics, it's easy to see why investors have been bidding up the shares. It's important to note, however, that there's plenty of growth baked into the company's current stock price. With a price-to-sales ratio of 34 over the trailing 12 months and an only slightly more reasonable forward-looking multiple of 28, any signs that the growth in revenue or customers is slowing could result in a swift and potentially brutal correction to its somewhat frothy valuation.

We'll know more when Okta reports earnings on Wednesday after the market close.

Danny Vena owns shares of Okta. The Motley Fool owns shares of and recommends Okta. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.