Once sacred, now rotting Silicon Valley adage ‘Grow at any cost’ crushes Okta: Stock plummets 80% from peak

It made huge losses, but now revenue growth is slowing. Interestingly, executives refer to huge losses as “profitability.”

Written by Wolf Richter for WOLF STREET.

Founded in 2009 and going public in April 2017, Okta is no longer a beginner startup. But last night, the company reported that he had a net loss of $210 million for the second quarter that ended July 31, and earnings he had $452 million. Since it began disclosing seven years ago, its losses have increased each year and now total over $2 billion.

But since the show of hype and hype unleashed in infamous February 2021, these kinds of stocks began to plummet and I started tracking them in my Imploded Stocks column. Today Okta joined a club that already has hundreds of members. And it succeeded spectacularly.that stock [OKTA] It’s back to where it started in August 2018, down 80% from its peak in February 2021 (data via YCharts).

Okta, which sells services to businesses that allow employees to securely access corporate cloud-based systems, has followed Silicon Valley’s dictum of using investor money to buy revenue growth. . According to this maxim, investors who are confused by growth ignore their net losses and focus on some homegrown metrics and earnings growth, so regardless of their net losses, if earnings increase, stock prices will go up. continue.

This once-holy, now-corrupt business model has worked well for years. Okta’s stock surged from an IPO price of $17 to a closing price of $23.51 on the first day, a 38% increase in his first day stock price, and a further surge from there to finally reach $294 during the day. February 12, 2021, before everything is solved. And with over $2 billion in net losses to date, there’s no end in sight.

Today’s stock market crash is the latest in a 16-month crash and ostensibly came as the company lowered its billing and earnings guidance for the rest of the year.

During the earnings call (as recorded by Seeking Alpha), management discussed “sales challenges,” “integration challenges,” and “sales challenges” related to Auth0, which Okta agreed to acquire on March 3, 2021. criticized the lowered guidance, largely due to a “decrease.” At the peak of the hype and hype, it has $6.5 billion in inventory.

The acquisition was another way Okta tried to buy revenue growth. And now the deal is not going well.

CEO Todd McKinnon blamed “challenges related to integrating Auth0 and Okta’s sales organization” as part of the reduction in guidance. “We recognize that we have more work to do to get back on track. We have taken some decisive actions that we believe will get us back on track,” he said.

CFO Brett Tighe blamed the reduction in guidance on “sales integration challenges” and “further declines in sales that resulted in lower than expected capacity for the rest of the year,” blaming the cuts. It is “associated with the macro environment”.

And as one would expect an earnings call to come while stock prices roared in the background, there was a lot of linguistic gaiety, including a huge net loss.

At the earnings call, no one, especially the analysts, made a fuss about the quarterly net loss or previous net loss. On the contrary, CEO Todd McKinnon said it “produced better-than-expected profitability,” with the term “profitability” replacing the offensive term “net loss” — and analysts say it ran.

Other executives have spoken out about things like “improving profitability prospects.” What that means is that you want your net loss to grow significantly and then hopefully shrink by a small amount.

Alas, the company posted a loss of $453 million in the first and second quarters of fiscal 2023, a 17% increase in net loss. That means greater profitability than the same period in 2021, etc. Net loss, meaning profitability and so on. Since we began reporting in fiscal 2016 (ended January 31, 2016), we have increased each year, up from $848 million last year and $453 million in the first half of this year (fiscal 2023). Including, the total is over $2 billion.

Now trying to contain those losses in this new environment means layoffs. Okta has started the process. This is what many other companies on my Her Imploded Stocks list have done. However, like the rest of the residents on that list, the scale of layoffs is still negligible.

Last week, Okta’s head of global sourcing, Jody Simon, announced on LinkedIn that “Okta’s entire U.S. procurement team has been eliminated.” Okta has since confirmed that his 24 have been fired. This represents approximately 0.4% of all employees worldwide. That doesn’t cut costs significantly, but it does show that they’re working towards the end of an era now.

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