Shares of Okta (NASDAQ:OKTA) have been under severe pressure, as high-growth stocks are getting hammered. Whether good, bad or mediocre, these stocks are being tossed out the window. Okta stock is in that group, as shares fell 34% from peak to trough in just two months.
Source: Michael Vi / Shutterstock.com
It’s got some investors looking for an opportunity in the name, while others are waiting for the next shoe to drop. Unfortunately, the main driver for the growth stock group may be the overall market.
The S&P 500, Nasdaq and Dow Jones are no more than 5% off their highs. Should they see even moderate selling pressure — say, down 7% to 10% from their highs — individual stocks will likely take another beating.
On the flip side, should the major indices push back to new highs, investors will likely feel confident enough to circle back to these names now that most of them are down 20% or more.
Valuing Okta Stock
After the recent decline, we’ve started to see some life in this group once again. Shopify (NASDAQ:SHOP) broke below $300, then reclaimed it, rallying to around $50 per share from its lows. Roku (NASDAQ:ROKU) jumped almost 10% on Wednesday after an analyst upgrade. After breaching the 200-day moving average, Okta stock has recovered nicely as well, up about 25% from the lows.
So, has this group bottomed? Perhaps. But I wouldn’t be surprised by a retest or a near-retest of the recent lows.
When we see a massive rally like we did in Okta Inc stock — a triple from the fourth-quarter lows — followed by a catastrophic unwind, these stocks need time to build bases. I can’t say confidently whether the latest shakeout has been enough or not. However, my biggest issue with OKTA is the valuation.
Last quarter, OKTA delivered a beat across the board. Earnings, revenue and management’s outlook for next quarter and the full year were impressive. As such, full-year expectations now call for 41% revenue growth this year to $562.86 million.
While the growth rate is impressive, we’re still talking about a stock with a $14.1 billion market cap. That’s 25-times current sales!
Say estimates of 34% revenue growth next year are too conservative, and Okta again grows revenue past 40%, say to $800 million. That’s great, but we’re still talking about 17.6-times forward sales at present value.
And remember, I’m no perma-bear on Okta. This was one of my favorite mid-cap stocks earlier this year. This group has performed incredibly well, even considering the big correction.
On the plus side, OKTA recently turned free cash flow (FCF) positive, while gross margins and gross profit continue to surge. On the downside, it’s not yet profitable and FCF is barely more than breakeven.
Trading OKTA Shares
Okta stock will rally eventually, but that doesn’t calm investors’ worries about the valuation. The question then becomes, when will names like Okta, Alteryx (NASDAQ:AYX), Veeva Systems (NASDAQ:VEEV), Shopify and others come to more realistic levels?
For instance, when will the price-to-sales ratios drop from the mid-20s to the teens? Not that that’s cheap, but it’s at least palatable. For Okta stock, that would drop the stock about 30% from current levels, based on fiscal 2020 (this year’s) sales. That would put shares more than 10 points below the September low, landing it down near $82.50.
Currently, shares are trading just under $120, as the 50-day moving average and 78.6% retracement keep a lid on Okta stock. Over $120 and OKTA may accelerate higher.
If this level holds shares in check, bulls need to see the 200-day moving average and the 61.8% retracement hold as support. If they fail, the September low near $93.50 is on the table.
So, is Okta Inc stock safe to buy yet?
For me, I like to see huge washouts in high-growth names once they’ve lost momentum. Specifically, I look for reductions exceeding 40%, like we’ve now seen in Roku. Specifically, with Okta, I would really like to see the stock decline more before initiating it as more than a trade.
More From InvestorPlace
- 2 Toxic Pot Stocks You Should Avoid
- 10 Super Boring Stocks to Buy With Super Safe Returns
- 10 Winning Stocks to Buy and Stick With for the Long Haul
- Don't Give Up on These 4 Cannabis Stocks