Investors aren't sure what to make of Okta (OKTA -1.66%) stock ahead of its late May earnings report. On one hand, the cybersecurity specialist looks poised for many years of potentially market-thumping growth as it gains share in key niches like digital-identity management. Yet Wall Street's optimism around those gains is tempered by Okta's poor finances following two consecutive years of big net losses.
The cloud-services company is aiming to take a step toward profitability in this fiscal year and might show progress along those lines in its upcoming report. So let's take a look at why investors might want to watch this stock as an attractive long-term holding.
Winning in a big market
Many software and cybersecurity companies offer identity-management services as part of much wider portfolios. But the main appeal for Okta is its focus on these mission-critical solutions.
That focus is delivering results. For its fiscal 2023 fourth quarter (ended Jan. 31), revenue rose 33% from the year-ago period, and for the full fiscal year sales were up 43% to $1.9 billion. "We're more excited than ever to advance our leadership position in a massive market," CEO Todd McKinnon said in an early March press release.
The big question for the May 31 earnings update will be whether enterprises reduced their spending further as economic growth slowed in early 2023. Most investors have high expectations here, with Wall Street pros forecasting $511 million of sales to hit the top end of management's outlook.
Steps toward profitability
The biggest knock against the stock right now is Okta's weak earnings. Slowing growth in 2022 and challenges around the integration of the Auth0 business combined to create a distressing financial performance in the past few years.
OKTA Operating Margin (TTM) data by YCharts.
Net losses have been over $800 million in each of the last two years. Even management's preferred metric of non-GAAP operating earnings only improved to a loss of 1% of sales in 2022 from 6% of sales in 2021. Investors will need to see continued progress here for the stock rally to push deeper into 2023. Look for Okta to report positive non-GAAP operating earnings for Q1, but the key question is whether executives boost their full-year outlook.
The fiscal 2024 outlook
Heading into the report, Okta is projecting that sales will land at about $2.2 billion this year, which would mark growth of around 17% compared to last year's 43% surge. Non-GAAP earnings could be as high as $145 million, which would translate into a roughly 7% profit margin compared to last year's 6% loss.
Hitting these numbers would represent excellent progress, but the stock's rally in 2023 suggests that investors are expecting to see a modest upgrade to the outlook in late May. However, if management says client budgets remain constrained, then shares could start underperforming the market again.
Those risks make the stock an excellent one to watch for signs that Okta is finally pairing strong market-share growth with sustainable profitability. Those factors haven't been present in the last several earnings reports, but there's a good chance that the recovery path will be much clearer beginning in June.
