Bank of America Downgrades Okta, Inc. (NASDAQ:OKTA)

Bank of America has double-downgraded Okta, Inc. from Buy to Underperform in a note to clients on Thursday. The downgrade is attributed to significant near-term headwinds that may overshadow the company’s future growth potential.

Despite better-than-expected second-quarter results, Okta’s third-quarter current remaining performance obligations (cRPO) guidance of 9% year-over-year growth fell 200 basis points below expectations, raising concerns about the immediate outlook.

The downgrade stems from:
– Continued softness within the SMB segment and new logo growth.
– Ongoing cost rationalization efforts among Okta’s existing customer base.

BofA analysts emphasized that while Okta has a strong long-term growth narrative, including promising new product launches and an improving financial profile, these positives may be overshadowed by cost optimization trends in the next few quarters.

Analysts expressed concern about:
– The specific challenges facing seat-based SaaS businesses such as Okta. Unlike consumption-based models, cost adjustments in seat-based models tend to last the duration of the average contract (approximately 2.5 years).
– The company is only a few quarters into this trend, indicating that these headwinds could persist for some time.

Additionally, Okta’s decision to pause research and development and new product launches to focus on internal security issues following a November 2023 breach is expected to delay any significant revenue contributions from new products.

As a result, Bank of America has lowered its price objective for Okta from $135 to $75 to reflect a reduced valuation multiple due to these ongoing challenges.

Despite the short-term headwinds, BofA commented that the long-term outlook for Okta remains promising, with ongoing platform adoption and improved financial performance.