Software companies Okta Inc. and Atlassian Corp. have been added to the list of “zombie” stocks compiled by equity research firm New Constructs.
“Companies with fast-depleting cash reserves are risky investments in any market,” wrote New Constructs CEO David Trainer in a accurate note, adding that rising interest rates and a slowing economy are adding fuel to the fire. “As these companies struggle to grow revenue, they will face margin pressures and serious challenges to raising more capital to fund their cash burn,” he added.
In the note, which was released before Okta’s third-quarter results came out last week, New Constructs warned that cash burn is an issue for the identity software company. “No matter how you analyze Okta’s business, one thing is clear: the company burns through a large amount of cash,” Trainer wrote. “Since fiscal 2018, the company has burned $3.8 billion in FCF [free cash flow] excluding acquisitions.”
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Okta has endured a turbulent year marked by sales-force difficulties and a hack dubbed “Oktapus.” But on Nov. 30, the software maker reported strong third-quarter results and forecast profitability for the fourth quarter and for fiscal 2024, sending its stock surging. Okta ended the following day’s session up 26.5%.
Okta’s stock has fallen 71.5% in 2022, compared with the S&P 500’s SPX, -0.73% drop of 16.8%. The company’s stock hit a 52-week low of $44.12 on Nov. 4. Of 33 analysts surveyed by FactSet, 20 have an overweight or buy rating, 11 have a hold rating and two have a sell rating for Okta.
Business-collaboration software company Atlassian was also added to New Constructs’ list of “zombie” stocks recently. “With only $1.8 billion [in] cash on the books as of September 30, 2022, Atlassian can only sustain its TTM [trailing 12-month] burn rate for another 23 months from the end of October 2022,” Trainer wrote in a separate note. “In other words, Atlassian will need either a capital raise or a significant change in business operations to remain a going concern.”
On Nov. 4, Atlassian’s stock suffered its worst day ever, weighed down by an earnings and revenue outlook that fell short of Wall Street expectations and wiping nearly $13 billion off the software company’s valuation. Atlassian hit a 52-week low of $113.86 on Nov. 21.
Now read: Atlassian stock suffers worst day ever, with nearly $13 billion in valuation wiped away
Atlassian, which makes software programs such as Jira, has seen its stock fall 64.4% in 2022.
The company disputes the “zombie” stock label. “We fundamentally disagree with New Constructs’ assertion that Atlassian is a zombie stock and that our business strategy will not yield continued growth,” an Atlassian spokesperson told MarketWatch in an emailed statement. “Atlassian continues to generate positive free cash flow quarter over quarter, while investing purposefully in creating value for our customers and scaling to become a 100-year company.”
The company ended its accurate fiscal first quarter with more than 249,000 customers and almost $76 million in free cash flow, up from $58.1 million in the prior year’s quarter, according to a letter to shareholders last month. “We experience seasonality in our free cash flow results, with [the first quarter] typically having the lowest free cash flow due to the timing of employee bonus payments,” the company said in the letter.
Atlassian also noted that its gross margin will decrease modestly in fiscal year 2023 “due to the continued business mix shift to the cloud and investments we are making to support cloud migrations.” The operating margin percentage will be in the mid-teens, the company said, consistent with its previously issued target, despite macroeconomic headwinds and adjustments to the company’s revenue target.
“Free cash flow is expected to be impacted, on a comparative basis, due to the lower operating margin in [fiscal year 2023] versus [fiscal year 2022],” Atlassian said in the shareholder letter. “Additionally, free cash flow may be impacted as a result of the continued business mix shift to the Cloud.”
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The company also explained that maintenance contracts for its server products and subscription contracts for its data center products are offered only on annual terms, while subscription contracts for its cloud products are offered on both annual and monthly terms. “In the short term, the shift to the Cloud and the potential mix change in billing terms may create a headwind for free cash flow,” Atlassian said in the letter. “Over the long term, as more enterprise customers migrate to the Cloud, we expect any such headwind to subside.”
Of 25 analysts surveyed by FactSet, 17 have an overweight or buy rating and eight have a hold rating for Atlassian.
Other companies on New Constructs’ “zombie” stocks list include Affirm Holdings Inc. AFRM, -2.41%, AMC Entertainment Holdings Inc. AMC, -2.06%, GameStop Corp. GME, -8.73%, Snap Inc. SNAP, +0.53%, Rivian Automotive Inc. RIVN, -4.51% and Carvana Co. CVNA, +1.71%.