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Why Okta Stock Was Sinking Today

By Jeremy Bowman - May 27, 2021 at 11:30AM

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Disappointing guidance pulled the stock lower.

What happened

Shares of Okta (OKTA 2.84%) were falling Thursday morning despite better-than-expected results in its fiscal first-quarter earnings report. Investors' disappointment seemed to stem from its bottom-line guidance for the rest of the year, which was much worse than expected, primarily due to its acquisition of Auth0, which closed this month.

As of 11:23 a.m. EDT, shares of the cloud security company were down by 11.3%.

Okta CEO Todd McKinnon gives a fist bump to COO Frederic Kerrest at the company's IPO

Image source: Okta.

So what

For the quarter that ended April 30, Okta delivered another round of solid growth, with revenue up 37% to $251 million, That topped estimates for revenue of $238.3 million. Its net retention rate was 120% -- so, on average, its established customers increased their spending with the company by 20% -- and its overall customer base grew by 27% to 10,650.

Remaining performance obligations, a measurement of sales backlog, increased 52% to $1.89 billion.

However, on the bottom line, its adjusted loss per share expanded from $0.06 to $0.10 as it spent money to integrate Auth0. Still, that was better than the analysts' consensus forecast for a loss of $0.20 per share. The company also posted record free cash flow or $53 million, or 21% of revenue, showing that the business is solidly profitable on a cash basis.

"With the closing of the Auth0 acquisition earlier this month, we are further enhancing Okta's market-leading identity platform, enabling us to provide even more choice and unprecedented innovation to customers and developers," CEO Todd McKinnon said, "Together, we'll capture more of the massive $80 billion identity market opportunity even faster."

Now what

What seemed to spook investors was the company's guidance for the rest of the year. While its top-line forecast was strong, getting a boost from the Auth0 acquisition, it expects wider losses ahead. For the current quarter, it forecasts an adjusted loss per share in the range of $0.35 to $0.36, which compared poorly to the analysts' consensus expectation for a loss of $0.11 per share. For the full year, Okta expects an adjusted per-share loss in the range of $1.13 to $1.16; analysts had been estimating a per-share loss of $0.44. These wider expected losses at least partly reflect the expenses involved in the integration of Auth0, but it's worth noting that Okta management's guidance has historically been conservative.

Additionally, Okta shared long-term revenue guidance for the first time, calling for $4 billion in annual revenue by fiscal 2026 -- which assumes compound annual growth of at least 35% -- and a free cash flow margin of 20%.

Given that guidance, the market's concerns about Okta's near-term losses seem overblown.

Jeremy Bowman owns shares of Okta. The Motley Fool owns shares of and recommends Okta. The Motley Fool has a disclosure policy.

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