OKTA

Why Did Okta Shares Jump 30% Higher in February?

Shares of Okta (NASDAQ: OKTA) rose 29.9% last month, according to data provided by S&P Global Market Intelligence. The cybersecurity stock was buoyed by an impressive quarterly earnings report. Okta's management team delivered impressive cost controls and fueled optimism about the company's ability to generate cash flow.

Fundamentals drove the gains

Any move higher is generally welcomed by investors, but it's even sweeter when returns are driven by fundamentals rather than speculation. Companies that report strong growth, profitability, or key performance metrics are generally more reliable than stocks that are gaining value primarily on hype.

Okta reported quarterly financial results on Feb. 28, and that news promptly launched the stock higher. The company narrowly exceeded Wall Street's sales forecasts, but it absolutely crushed earnings estimates. That data offered compelling evidence that the cybersecurity company not only has control over its spending, but also that it doesn't need to sacrifice much growth in order to rein in costs.

Okta reported 19% revenue growth last quarter, which is impressive, but not enough to move the stock on its own. Its 130% operating cash flow growth was the more noteworthy figure. Many growth stocks struggle to transition to more efficient operating models as their expansion inevitably decelerates. Okta's latest results indicate that it's likely well equipped to operate as a profitable company that doesn't need extreme growth every year.

As a nice cherry on top, Okta also reported yet another quarter of excellent net dollar retention. This means the company is keeping its customers and expanding those relationships significantly over time. Poor dollar retention would indicate inefficient sales practices or a competitive disadvantage, but these results suggest that Okta is flourishing.

The stock's valuation might be tough to sustain

Okta is forecasting major deceleration on the top line, with only 10% to 11% revenue growth for next year. That's nothing to sneeze at, but it isn't necessarily high enough to thrill growth investors. Corporate guidance should always be taken with a grain of salt, and it could easily be a case of sandbagging -- management teams love to set and exceed attainable goals. Still, it's unlikely that the business will accelerate next year -- strong cash flow generation will need to be the focus.

Okta's forward P/E ratio is over 50 and its price-to-sales is around 7.9. These are reasonable valuation ratios for a growth stock, but they look a bit aggressive compared to a 10% or even 20% revenue growth rate. There's a good chance that profits and cash flows will expand much more quickly than sales, keeping investors happy. Any indication of that narrative falling apart could lead to significant volatility.

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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Okta. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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