What happened
Shares of Okta (OKTA -0.10%) were tumbling today after the company issued a strong second-quarter earnings report but said it was having challenges integrating Auth0, the customer identity software company it acquired last spring.
Management also called into question its long-term growth target of $4 billion in revenue by fiscal 2026 (ending January 2026), saying it was reevaluating those targets and would update investors on the next earnings call.
Altogether, that was enough to spoil an otherwise solid quarter, and the stock was down 29.6% as of 9:50 a.m. ET.
So what
Okta, which provides cloud identity software to more than 16,000 organizations, actually exceeded estimates by wide margins. Revenue in the quarter jumped 43% to $451.8 million, easily beating the analyst consensus at $430.6 million.
Other metrics indicated that top-line growth could be slowing as remaining performance obligations (RPO), or backlog, grew just 25% to $2.79 billion, though that is at least partly due to signing up government agencies that tend to have shorter contracts. Current RPO, which measures the backlog contracted to be fulfilled in the next year, increased 36% to $1.5 billion, also showing that revenue growth could soon decelerate.
On the bottom line, Okta's adjusted loss of $0.10 per share was a penny better than a year ago, but that was much better than estimates at a per-share loss of $0.30.
On the earnings call, Okta discusses challenges with integrating the Auth0 sales force, and said it was reducing hiring goals in the second half of the year in order to focus on profitability. It also said macroeconomic headwinds were getting stronger, and it was seeing sales cycles starting to lengthen, a sign of customer cautiousness.
Now what
Several analysts downgraded the stock after the update, which seemed to contribute to the sell-off, as Okta stock was down just 12% in the after-hours session last night.
Despite the market's reaction, there is reason to be optimistic. Management is facing the challenges head-on. It has replaced the salespeople it's lost, though it's still ramping them up, and it's adjusted its go-to-market strategy to make it clearer to customers and its sales force as to which customer identity product they should be working with -- Okta or Auth0.
Investors should keep an eye out for the long-term update set for Q3, but today's sell-off could prove to be a buying opportunity down the road. The SaaS stock is now cheaper than it's ever been on a price-to-sales basis, trading at a multiple of just 6, and it's widely considered the leader in cloud identity software, an addressable market it now values at $80 billion.
If the company can overcome the short-term headwinds, this could be a multibagger in a few years.
