Bank of America double-downgraded Okta, Inc. (NASDAQ:OKTA) to Underperform from Buy in a note to clients on Thursday, citing significant near-term headwinds that are expected to overshadow the company's future growth potential.
The bank explains that despite reporting 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 company's immediate outlook.
The downgrade is largely driven by "continued softness within the SMB segment and new logo growth," as well as ongoing cost rationalization efforts among Okta's existing customer base.
According to BofA, while Okta has a strong long-term growth narrative—including promising new product launches and an improving financial profile—the timing and impact of current cost optimization trends are likely to outweigh these positives over the next few quarters.
Bank of America analysts highlighted that the impact of cost optimization is particularly challenging for seat-based SaaS businesses like Okta.
"While there is a lot to like long term, including new product launches, GTM initiatives, and an improving financial profile, in our view the timing impact and nuances of the cost optimization trends are likely to outweigh the positives for the next few quarters, and we believe the stock, which has underperformed the NASDAQ YTD (+7%/+17%), could be further pressured," they wrote.
BofA said that unlike consumption-based models, where cost adjustments can be quickly reversed, seat-based optimizations typically last the length of the average contract, which for Okta is about 2.5 years.
The analysts also noted that the company is only a few quarters into this trend, suggesting 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 following the November 2023 breach is expected to delay any significant revenue contribution from new products.
As a result, Bank of America has lowered its price objective for Okta from $135 to $75, reflecting a reduced valuation multiple due to these ongoing challenges.
"Despite the short-term headwinds, the long-term continues to look promising," said BofA, noting the company continues to see platform adoption and improves its financial performance.