2 Fallen Cybersecurity Stocks for Patient Bargain Hunters

 | Oct 30, 2023 09:16AM ET

  • Okta is a leading identity access management (IAM) services provider with major clients and partners, including Google, Microsoft, Amazon, IBM and Oracle.
  • Okta suffered a security breach on October 20, 2023, triggering a 20% drop in shares, creating a potential buying opportunity for a company with 23% YoY sales growth and raised guidance.
  • Sentinel One beat and raised guidance after restating its ARR in Q1 2023.

    • Cybersecurity stocks have been strong performers this earnings season. Many leaders are higher priced stocks in the $100 to over $300 range. Companies like Palo Alto Networks (NASDAQ:PANW) at $238, ServiceNow (NYSE:NOW) at $554, CrowdStrike Holdings (NASDAQ:CRWD) at $172, and Zscaler (NASDAQ:ZS) at $154 may be out of reach for smaller investors. But you have to pay for quality in the stock market.

    This means paying up for top-quality companies that have integrated artificial intelligence (AI) into their platforms. However, some openings occur due to a security incident, or earnings miss that temporarily knock down share prices. For risk-tolerant and patient investors looking to pay less during a volatile period, here are two security stocks with temporary shortfalls and the potential for a turnaround.

    h2 Okta Inc/h2

    Okta (NASDAQ:OKTA) is a leading identity and access management (IAM) services provider. Okta has a solid, growing, double-digit, thriving business that's been raising its guidance. The company provides services including single sign-on (SSO), enabling verified users to log into multiple applications with one set of credentials, multi-factor authorization, access management and user lifecycle management from onboarding to offboarding. Some of its biggest clients and partners include Microsoft Corporation (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN) and Oracle Corporation (NYSE:ORCL).

    h2 Opportunity in Misfortune/h2

    One of the worst things to happen to a cybersecurity company is to reveal that a security breach occurred. After all, that's what clients pay them to prevent. This can take a top-performing stock straight into the dumper. The implication is that clients will cut ties immediately and switch providers as its reputation gets destroyed. However, this can lead to an overreaction that provides an opportunity for prudent investors.

    h2 Security Breach /h2

    Okta suffered a data breach on October 20, 2023, causing shares to tumble over 20% in days. For investors holding shares, this is a painful event. For investors kicking the tires, this may be an opportunity to capitalize on cheaper shares. The security breach enabled a threat actor with stolen credentials to view files uploaded by some Okta customers for recent support cases. Okta support case management systems are completely separated from its Okta service, which is fully operational and unaffected. The Auth0/CIC case management system is not impacted either. The affected customers were notified without impacting the Okta environment or support tickets.

    h2 Okta Security Software Concerns /h2
    Get The News You Want
    Read market moving news with a personalized feed of stocks you care about.
    Get The App

    While this sounds like a minimal occurrence, it comes after hackers were able to breach Okta software at casinos, including MGM Resorts International (NYSE:MGM), Caesars Entertainment Corporation (NASDAQ:CZR) and three other companies this year. Okta stated there was "no compromise or breach in Okta systems" but social engineering techniques by hacker groups AlphaV and Scattered Spider. Social engineering hacking involves phishing (email or text messages to steal sensitive info), baiting (victim is lured into provider sensitive information), watering hold (hackers infect sites the victims often visit), tailgating (hacker physically gains access to the unauthorized area) and pretexting (creating a backstory to compel the victim to help). These instances impact Okta's reputation and potential impact on attaining new customers.

    h2 Solid Revenue and Earnings Growth/h2

    Okta had a strong Q2 2023 earnings report leading up to this incident. Okta reported fiscal Q2 2024 earnings of 31 cents per share, beating estimates by 9 cents. Revenues grew 23% YoY to $556 million, beating $534.67 million analyst estimates. Current remaining performance obligations (RPO) rose 18% to $1.77 billion. Okta CEO Todd McKinnon commented, "We are building on our position as the leading independent identity partner. Both new and existing customers are getting tremendous value from the Okta platform as they seek to simplify their infrastructure while increasing security by integrating identity into their most important projects."

    h2 Lifting the Bar/h2

    Okta raised its fiscal Q3 2024 revenue guidance of $558 million to $560 million versus $552.86 million consensus analyst estimates. It raised fiscal Q3 2024 EPS to 29 to 30 cents versus 20 cents consensus estimates. Fiscal full-year 2024 revenue guidance was raised between $2.207 billion to $2.215 billion versus $2.18 billion analyst estimates.

    h2 Analyst Actions /h2

    Citigroup placed OKTA on a 90-day Downside Catalyst Watch list with a Neutral rating. Citi analyst Fatima Boolani commented, "We're opening a negative Catalyst Watch on possible narrative/sentiment overhang inhibiting multiple expansion and the potential for reputational risk affecting new pipeline development." Evercore ISI added Okta to its Tactical Outperform list. On October 26, 2023, Daiwa Securities raised its rating to Buy from Outperform and an $87 price target.