Why Okta Stock Soared 22% in August and Why There's More Upside Ahead
Key Points
Okta was one of many companies taken down by fears that AI would render its offerings obsolete.
Cooler heads prevailed, and the stock rebounded.
Okta's recent results confirmed what some investors already suspected.
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Shares of Okta (NASDAQ: OKTA) soared in August, gaining 21.9%, according to data supplied by S&P Global Market Intelligence. That's more than eight times the 2.6% gains of the S&P 500 during the same period.
It turns out the threat of artificial intelligence (AI) to the cybersecurity sector wasn't as bad as some feared.
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What SaaSpocalypse?
Earlier this year, software-as-a-service (SaaS) stocks took a beating, thanks to fears that some investors called the "SaaSpocalypse." The crux of the popular narrative was that AI agents would take over many of the jobs currently handled by SaaS offerings, rendering them obsolete. The ensuing frenzy took down a broad range of cybersecurity stocks, and Okta wasn't spared, losing 27% of its value between early January and early April.
While the jury was still out, patient investors kept their heads, which was a profitable decision. For its fiscal 2027 second quarter (ended July 31), Okta reported results that confirmed what astute investors already knew. Revenue of $805 million rose 11% year over year, driven higher by subscription revenue of $793 million, up 12%. The company's adjusted gross margin held steady at 82%, and adjusted earnings per share (EPS) of $1.05 rose 15%. This was well ahead of analysts' consensus estimates of revenue of $793 million and adjusted EPS of $0.97.
Okta turned a greater percentage of profits into greenbacks. Operating cash flow of $234 million jumped 40%, while free cash flow of $227 million also increased 40%.
Other metrics were equally robust. Okta's remaining performance obligation (RPO) -- or contractually obligated revenue that hasn't yet been recognized -- climbed 17% to $4.86 billion, while current RPO (which will be recognized within 12 months) jumped 14% to $2.59 million. This was far from the SaaSpocalypse-related rout investors had anticipated.
CEO Todd McKinnon explained, "As AI agents transform every layer of technology, every agent needs a trusted identity and clear controls over what it can access and do." Far from being displaced by AI, Okta is becoming an integral part of the process.
Management's forecast also gave investors confidence, as Okta's outlook called for revenue of $815 million and adjusted EPS of $0.93, up 10% and 13%, respectively. The company is also guiding for current RPO of roughly $2.6 billion, up nearly 12% year over year. It's generally a positive sign when RPO growth outpaces revenue, as it indicates the company is building a solid foundation for future growth.
Okta's recovery has caused a commensurate rebound in its valuation. The stock now sells for 53 times forward earnings and 38 times next year's expected earnings -- so it isn't exactly cheap. However, with the SaaSpocalypse seemingly put to rest, the future looks bright for Okta.
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Danny Vena, CPA has positions in Okta. The Motley Fool has positions in and recommends Okta. The Motley Fool has a disclosure policy.
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