Why Okta, Twilio and Salesforce are bucking the trend of cloud-software stocks’ slide

Cloud-software stocks continued to sell off Monday, following one of the space’s worst weeks ever, although not as fast as Friday selloff a few beaten-up stocks received upgrades and giants like Salesforce Inc. bounced back from their worst day in years.

Last week was the worst week ever for the Global X Cloud Computing ETF CLOU,
the third worst week on record for the First Trust Cloud Computing ETF SKYY,
and the WisdomTree Cloud Computing Fund WCLD
managed to avoid its worst week ever by 2 basis points, according to FactSet data.

While both Atlassian Inc. TEAM
and Twilio Inc. TWLO
shares raced for the bottom Friday, Twilio shares bounced back 6% Monday while Atlassian’s fell 4%. Last week, Atlassian shares had their worst week ever after execs said customers were converting to paid subscriptions from freemium versions at a slower pace, while Twilio caught a two-notch downgrade from B. of A. Securities analyst Michael Funk before the company forecast a poor outlook.

From Late Friday: Think you had a bad week? Salesforce, cloud companies had some of their worst weeks ever

Those declines had bled over to the largest cloud-software names as well as Friday, even as most have yet to report earnings this season. Last week, Salesforce Inc. CRM
shares logged their worst week since 2011 with a 15% decline, and Service Now Inc. NOW
shares fell 14.6% for the week. Salesforce shares rose 2% Monday, Service Now shares declined 0.3%

On Monday, bright spots were seen in shares of Workday Inc. WDAY
shares, which had their worst week ever last week and Okta Inc. OKTA
shares, which had their second worst ever.

Guggenheim analyst John DiFucci upgrade both shares of Okta and Workday in a note Monday. DiFucci upgraded Okta to a buy from neutral, and Workday to a hold from a sell.

At the end of August, Okta sales rep churn was higher than usual because of “short-term challenges” with the company’s assimilation of reps from last year’s acquisition of Auth0.

“While we recognize the company is facing challenges that could take several quarters to effectively address, we find current valuation levels too compelling to ignore,” DiFucci said.

“If the company even trips over anything positive, we would expect the stock to begin to re-rate towards a more reasonable multiple,” said DiFucci, who expects execution issues are priced into the stock.

For Workday, DiFucci said the price has just fallen below his targets, and while he still believes Workday’s goals of 20% or more annual average growth and revenue of $10 billion by 2026.

Jefferies analyst Brent Thill said software is “still” searching for the bottom.

“Given the massive software sell-off, nowhere is safe, not even security, which used to be a safe haven,” Thill said, adding it is going to be a cold winter with a tough macro environment.

Also, many software companies have “seat-based” models, which will get cut along with jobs, as tech sector layoffs roll out like Elon Musk-owned Twitter.

And “the Fed commentary or Friday jobs report didn’t help either,” said Evercore ISI analyst Kirk Materne, who called it a said it was a “brutal week across software.”

“Earlier this week, we published a note discussing the growing importance of delivering a healthier balance of revenue growth and operating margin in terms of how investors are now valuing companies,” Materne said, noting the dynamic favors larger companies.

Management teams that are “committed to margin expansion” include Salesforce and Workday in large-cap, and Splunk Inc. SPLK
and Qualtrics International Inc. XM
in small-to medium-caps, the analyst said. Materne has outperform ratings on all four stocks.

Meanwhile, shares of Snowflake Inc. SNOW and MongoDB Inc. MDB shares continued with last week’s losses and hares of cybersecurity company Cloudflare Inc. NET,
fell along with shares of Zscaler Inc. ZS
and CrowdStrike Holdings Inc. CRWD.

Fortinet Inc. FTNT,
which turbocharged last week’s declines kicked off that decline Thursday, after forecasting fourth-quarter billings late Wednesday that undershot analysts’ expectations.

Read: Security-software stocks are suffering from this one gloomy forecast

Cybersecurity stocks had their worst week in 2½ years, with the ETFMG Prime Cyber ​​Security ETF HACK
down 9.6%, its worst since a 9.9% drop the week ended March 13, 2020. The First Trust Nasdaq Cybersecurity ETF CIBR
was down 9.8%, its worst week since early 2020.

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