Okta Shares Still Look Overvalued, Even After Plummeting Lower Recently

Shares of cloud identity-management company Okta (OKTA -0.73%) have provided investors with disastrous returns over the last three years that were made worse by a huge sell-off in the stock following the tech company’s fiscal second-quarter earnings report. Shares are down more than 20% since the Aug. 28 report.

Though it might be tempting to buy the dip in this growth stock, investors may want to think twice before they do. This may be a growing company, but that doesn’t mean shares will appreciate meaningfully in the coming years. With a market capitalization of about $13 billion at the time of this writing, the company’s underlying fundamentals fail to live up to its valuation.

Decelerating growth and a disappointing bottom line

Okta’s fiscal 2025 second-quarter revenue increased 16% year over year to $646 million, management reported to investors last week. This was driven by a 17% year-over-year increase in its subscription revenue (98% of total revenue).

This growth is good but not great — especially when considering that it’s a slowdown from the company’s 22% revenue growth in fiscal 2024. But there are several issues, starting with the company’s guidance for just 13% year-over-year growth for the full current fiscal year. This suggests management expects a significant deceleration in top-line growth in the second half of the year.

To this end, management guided for fiscal third-quarter revenue of $648 million to $650 million, representing 11% year-over-year growth. Management said in the company’s earnings report that this guidance factors in a challenging macro environment, consistent with what it experienced in fiscal Q2, as well as some conservatism due to potential impacts from a security incident the company suffered from last year.

The second issue with these business fundamentals is the company’s profit. Okta reported net income of just $29 million on this $646 million of revenue, giving it a net profit margin of just 4%. And I’m being kind citing this figure as Okta’s net margin because the company lost money on a trailing-12-month basis.

A pricey valuation

Things really get discouraging when considering Okta as a potential investment as investors start looking at valuation. The company commands a nearly $13 billion market capitalization despite its trailing-12-month bottom line coming in at a loss of $136 million.

One thing the company has going for it is its huge chunk of change. Okta has more than $2.3 billion of cash, cash equivalents, and short-term investments on its balance sheet. This is a meaningful sum for a company of this market cap. A war chest like this could be what it takes to make the proper investments in the company’s growth opportunities to start generating meaningful profits in the future.

Still, Okta’s underlying fundamentals are just too disappointing when viewed next to the tech company’s valuation to call this a good investment today. While the company could prove me wrong, I think this is unlikely, given management’s near-term forecast for its top-line growth to slow and considering the company hasn’t demonstrated significant profits yet.

Okta is a great business but a bad stock. However, if shares took a bigger haircut, I might reconsider my opinion.