What happened
Shares of Okta (OKTA -0.65%) continued to slide last month, as the identity-focused cloud software stock got hit hard by the Federal Reserve's decision to raise interest rates by half a point, and investor sentiment continued to shift away from expensive software-as-a-service stocks like Okta.
According to data from S&P Global Market Intelligence, the stock finished May down 30%. Most of those losses came in the week after the Federal Reserve decision:
So what
The primary reason for the stock's pullback was the Fed's rate increase, which pushed its benchmark interest rate up by a half a point for the first time since 2000.
Image source: Getty Images.
That tends to be a bad news for high-priced unprofitable stocks like Okta, since it raises the discount rate in the discounted cash flow model, making long-dated earnings worth less. Since many software-as-a-service stocks trade at high multiples but are unprofitable, a number of them fell sharply on the news. Okta stock lost 26% in just three days.
In the aftermath of that slide, several analysts lowered their price targets on Okta. DA Davidson analyst Rudy Kessinger lowered his price target from $225 to $125 but maintained a buy rating on the stock even as he lowered his estimates as a result of the company's security breach. Two other analysts also lowered their price targets as the stock has fallen considerably, but they maintained buy ratings, arguing that the underlying business fundamentals remained strong.
Now what
In early June, Okta reported first-quarter earnings, which seemed to quell any concerns following the security breach and the stock sell-off. Shares jumped 5% on June 3 on the report, even as the broad market fell sharply that day.
Revenue jumped 65% to $415 million, helped by its acquisition last year of Auth0, which easily beat estimates at $389 million. Its remaining performance obligations, or subscription backlog, increased 43% to $2.71 billion.
On the bottom line, it posted an adjusted per-share loss of $0.27, compared with a per-share loss of $0.10 in the quarter a year ago. The company also raised its guidance for the year, indicating continued strength in spite of the data breach.
Okta stock is down nearly two-thirds from its peak late last year, and given the strong quarter, the stock is looking compelling at a price-to-sales ratio of 9 based on this year's expected revenue.
If investor sentiment begins to shift back to tech stocks, Okta could soar.
