Okta (OKTA -0.66%) is ready to shift its focus away from just growth. The identity-management specialist made the announcement of this pivot after telling investors it might not achieve some of its ambitious long-term financial goals.
Let's look at whether that new focus makes the stock a buy today, given Okta stock's over 70% price slump since the start of 2022.
Auth0 has been an expensive acquisition
Okta's second-quarter growth looked solid, with sales up 43% year over year in the period that ended in late July. This surge was driven by a fundamental, long-term shift toward the type of digital identity management and security products that are right in the software giant's competitive wheelhouse. Zero-trust security, digital transformation, and cloud adoption continue to drive the identity-management market, CEO Todd McKinnon said in a press release.
But executives admitted in a conference call with Wall Street analysts that sales trends were "not where we wanted them to be." The main problem was integrating the huge Auth0 business that Okta acquired last year. Many of those sales representatives quit during the quarter, and potential customers were also confused about which platform they needed.
Okta is also facing other challenges
Okta's second challenge is that demand trends appear to be slowing. "The weakening economy is having some impact on our business," according to executives, and investors can see evidence of that slump in the fact that backlog rose just 25% in the second quarter compared to the prior quarter's 43% surge.
OKTA operating margin (TTM). Data by YCharts. TTM = trailing 12 months.
That slowdown looks worse when judged against industry peers like Palo Alto Networks (PANW -0.11%), which recently announced solid sales growth while boosting its outlook for the rest of the year. Palo Alto Networks also achieved profitability for the first time in several years, and that has helped the stock beat the market so far in 2022.
Okta's biggest challenge
The growth picture gets even more cloudy now that management is reevaluating the long-term growth goals for over $4 billion in annual revenue, plus impressive cash flow, by 2026.
It is possible that executives might reaffirm this goal in a few months, or they could announce just a modest downgrade that reflects temporarily weak selling conditions. In that scenario, the stock price could surge, and claw back much of the 70% decline shareholders have seen since early January.
Yet there are some good reasons for that pullback. Okta's Auth0 acquisition will take several more quarters to fully integrate, and even then it might not deliver the boost to sales and earnings that management had hoped for when it made that expensive purchase. Okta's sales and integration challenges have opened the door for market share losses to rivals that have a clearer value proposition right now.
These issues don't mean that the growth thesis for the stock is broken. But they do imply that more bad news could be on the way before a clear recovery begins. As a result, investors might want to watch Okta from the sidelines for a while before deciding to jump in.
If the company can't protect its leadership positions in security and identity management, then it won't benefit as much from the multiyear expansion that's expected in this attractive industry.
