Okta has gotten torched over the last six months - since May 2024, its stock price has dropped 28% to $73.90 per share. This might have investors contemplating their next move.

Even though the stock has become cheaper, we don't have much confidence in Okta. Here are three reasons why OKTA doesn't excite us and one stock we'd rather own today.

Why Is Okta Not Exciting?

Founded during the aftermath of the financial crisis in 2009, Okta (NASDAQ:OKTA) is a cloud-based software-as-a-service platform that helps companies manage identity for their employees and customers.

1. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Okta’s management team is currently guiding for an 11.1% year-on-year increase in sales next quarter. Looking further ahead, sell-side analysts expect Okta’s revenue to grow 8.7% over the next 12 months, a deceleration versus its 34% annualized growth rate for the last three years. This projection is underwhelming and implies its products and services will see some demand headwinds.

2. Operating Losses Sound the Alarms

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to sales and R&D. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Okta’s expensive cost structure has contributed to an average operating margin of negative 10.6% over the last year. Unprofitable, high-growth software companies require extra attention because they spend loads of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Okta reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

3. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Okta’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 24.8% for the last 12 months will decrease to 21.5%.

Final Judgment

Okta isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 4.8x forward price-to-sales (or $73.90 per share). This valuation could be reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend taking a look at Cloudflare, one of our top software picks that could be a home run with edge computing.

Stocks We Like More Than Okta

The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.

Get started by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like Comfort Systems (+783% five-year return). Find your next big winner with StockStory today for free.