Over the past six months, Okta has been a great trade, beating the S&P 500 by 15.3%. Its stock price has climbed to $113.87, representing a healthy 26.2% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Okta, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Okta Not Exciting?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons you should be careful with OKTA, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Okta’s billings came in at $612 million in Q1, and over the last four quarters, its year-on-year growth averaged 10.8%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Okta’s revenue to rise by 9.1%, a deceleration versus its 27.1% annualized growth for the past five years. This projection doesn’t excite us and implies its products and services will see some demand headwinds.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, Okta’s operating margin rose by 5.1 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 5.5%.
Final Judgment
Okta isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 6.3× forward price-to-sales (or $113.87 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re fairly confident there are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.
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