Okta stock price has crashed into a bear market after falling by 27% from its highest level this year. It was trading at $92 on Friday, and has formed the highly bearish death cross pattern, pointing to more downside. 

Okta earnings preview

Okta, a top player in the cybersecurity space, has plunged in the past few months. This crash began in March, when the company published its quarterly results, in which it slashed its forward guidance, citing an “uncertain economic environment.”

The last results showed that its revenue rose by 12% to $688 million in the first quarter. Most of this revenue was in its subscription business, which jumped to $673 million. 

Most importantly, the subscription backlog rose by 21% to $4.08 billion. This is an important figure that shows the amount of backlog expected to be recognized in the next 12 months.

Okta’s profitability continued growing in the first quarter, with its net income moving to $62 million, up from $42 million in the previous quarter. 

The next important catalyst for the Okta stock price will be its second-quarter earnings report, scheduled for release on Tuesday this week.

In its earnings guidance, the company guided that its revenue coming in between $710 million and $712 million, representing a 10% annualized growth rate. Its guidance was for its non-GAAP operating income coming in between $183 million and $185 million, a 26% margin.

The management expects that its annual revenue will be between $2.85 billion and $2.86 billion, and a free cash flow margin of 27%.

Wall Street analysts, on the other hand, see Okta’s revenue being $711 million and its EPS rising to 85 cents. Judging by its history, chances are that the company’s revenue and EPS will be better than expected as it has done in the past few years.

The upcoming results will provide more color on its business and whether it is seeing more demand from companies amid the ongoing tariff debacle. Judging by the recent strong Palo Alto Network results, it is likely that it will report strong numbers.

Is Okta cheap or expensive before earning?

A key concern about Okta is that, at $16 billion, the company is highly overvalued. Besides, this valuation gives it a price-to-earnings ratio (GAAP) of 106, and a non-GAAP multiple of 27. Its valuation multiples are much higher than other companies in the sector.

While P/E multiples are useful, investors typically use the rule of 40 to estimate whether companies are undervalued or overvalued. 

The rule of 40 simply adds a company’s revenue growth and its margins. In Okta’s case, the forward revenue growth for the year is 10%, while the non-GAAP operating income margin is 25%, giving it a rule-of-40 ratio of 35%, a sign that it is a bit overvalued. 

However, when considering the free cash flow margin, the rule-of-40 ratio comes in at 42%, which is good.

Okta stock price analysis

Okta stock chart | Source: TradingView

The daily timeframe chart shows that the Okta share price has moved into a bear market after falling from $127.46 in May to $92. Worse, it has formed a death cross pattern as the 50-day and 200-day Exponential Moving Average (EM) have crossed each other. 

It has also formed what looks like a head-and-shoulders pattern. Therefore, there is a risk that the Okta stock price will continue falling, potentially to the support at $80 after its results. A move above the death cross point at $96 will invalidate the bearish view.

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