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MarketWatch First Take: Okta and Atlassian added to ‘zombie’ stocks list by equity research firm New Constructs

Software companies Okta Inc. and Atlassian Corp. have been added to the list of “zombie” stocks compiled by equity research firm New Constructs.

Okta
OKTA,
-2.55%

and Atlassian
TEAM,
+0.06%

are facing significant cash burn, according to New Constructs, which uses machine learning and natural language processing to parse corporate filings and model economic earnings.

“Companies with fast-depleting cash reserves are risky investments in any market,” wrote New Constructs CEO David Trainer in a recent 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 this 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.”

Now read: Okta stock surges more than 25% as analysts approve of company’s profit heading

Okta has endured a turbulent year marked by sales-force difficulties and a hack dubbed “Oktapus.” But late Wednesday, 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 Thursday’s session up 26.5%, while the S&P 500
SPX,
-0.45%

declined 0.1%.

On Friday Okta pulled back and the stock was down 3.1%, compared with the S&P 500’s decline of 0.9%. Okta’s stock has fallen 70.9% in 2022, compared with the S&P 500’s drop of 15.2%.

Okta 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 of 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.”

Now read: Atlassian stock suffers worst day ever, nearly $13 billion in valuation wiped away

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.

Atlassian, which makes software programs such as Jira, has seen its stock fall 63.5% in 2022.

Of 23 analysts surveyed by FactSet, 17 have an overweight or buy rating and eight have a hold rating for Atlassian.

Related: Rivian: ‘Zombie’ company or charging down a path to EV success?

Other companies on New Constructs’ “zombie” stocks list include Affirm Holdings Inc.
AFRM,
-1.11%
,
 AMC Entertainment Holdings Inc.
AMC,
+2.51%
,
 GameStop Corp.
GME,
+2.56%
,
 Snap Inc.
SNAP,
-2.63%

 , Rivian Automotive Inc.
RIVN,
-1.02%

and Carvana Co. 
CVNA,
-4.37%
.

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