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 Inc. (NASDAQ: PANW) at $238, ServiceNow Inc. (NYSE: NOW) at $554, CrowdStrike Holdings Inc. (NASDAQ: CRWD) at $172, and Zscaler Inc. (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.
Okta Inc. (NASDAQ: OKTA)
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 Co. (NASDAQ: MSFT), Alphabet Inc. (NASDAQ: GOOGL), Amazon.com Inc. (NASDAQ: AMZN) and Oracle Co. (NASDAQ: ORCL).
Opportunity in misfortune
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.
Security breach
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.
Okta security software concerns
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 Inc. (NYSE: 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.
Solid revenue and earnings growth
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."
Lifting the bar
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.
Analyst Actions
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.
OKTA analyst ratings and price targets are at MarketBeat. OKTA peers and competitor stocks can be found with the MarketBeat stock screener.
Ascending Triangle Breakdown
The daily candlestick chart on OKTA was setting up for an ascending triangle breakout through the flat-top trendline resistance at $91 until the security breach news on October 20, 2023. This caused OKTA to collapse through the ascending trendline support at $73.50 and continue falling through the daily market structure low (MSL) trigger at $70.50. The daily relative strength index (RSI) collapsed from the 65-band towards the oversold 30-band. The $67.72 has been a support, but it could give way to a breakdown. Pullback support levels are $64.67, $60.22, $58.12 and $52.75.
Sentinel One (NYSE: S)
Cybersecurity firm Sentinel One provides endpoint protection through a unified platform that helps to simplify the security stack for customers. It enables detection and response using artificial intelligence (AI) and machine language (ML) to identify and block suspicious and malicious activity at endpoints. Endpoints include servers, desktops and laptops. It provides tools that security teams can utilize to respond to threats. It also proactively hunts to identify and investigate threats before they become damaging cyberattack incidents.
Recovering from a 40% plunge.
Sentinel One saw its stock plunge 40% in May 2023 when it revealed miscalculating its annual run rate (ARR) due to a change in methodology to correct historical inaccuracies. The company also announced a 5% layoff amid lower guidance and macroeconomic pressures. The stock has since been recovering slowly from the bottom at $12.43. Earnings have been improving since then.
Beat and Raise
On August 31, 2023, Sentinel One reported a fiscal Q2 2024 EPS loss of 8 cents, beating consensus analyst estimates by 6 cents. Revenues grew 45.8% YoY to $149.42 million, beating $140.98 million consensus analyst estimates. ARR rose 47% YoY to $612.2 million as of July 31, 2023. The total customer count rose 30% YoY to exceed 11,000. Customers with an ARR of $100,000 rose 37% to 994. Dollar-based net revenue retention rose by 115%.\
Sentinel One raised its fiscal Q3 2024 revenues to $156 million versus $154.22 million. It raised fiscal full-year 2024 revenues to $605 million, up from $590 million to $600 million, versus $594.33 consensus analyst estimates.
CEO Comments
Sentinel One CEO Tom Weingarten commented, "From the beginning, we designed our AI-powered Singularity platform to deliver autonomous enterprise security. Our approach is helping enterprises consolidate security spend and simplify security operations while getting best-in-class autonomous protection." In a CNBC interview, he noted that the company is not up for sales, and valuation is low while the future is bright. There is stabilization in the market, similar to the beginning of the year, and customers remain focused on saving cash.
Sentinel One analyst ratings and price targets are at MarketBeat.
Daily Symmetrical Triangle
The daily candlestick chart for S indicates a symmetrical triangle pattern. The upper descending trendline resistance started after peaking at $21.96 on May 30, 2023. S collapsed on its Q1 2023 earnings release when it disclosed having to restate its ARR. Shares fell to a low of $12.43 on June 6, 2023. The ascending lower trendline support commenced from the lows, rising as S made higher highs on pullbacks, forming a daily MSL trigger at $16.42. S is testing the ascending trendline as the daily RSI stalls just under the 40-band. Pullback support levels are $14.78, $ 13.87, $13.25 and $12.43.
