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Dynatrace: Anticipating More Volatility

Jun. 14, 2020 4:36 PM ETDynatrace, Inc. (DT)
Kayode Omotosho profile picture
Kayode Omotosho


  • Dynatrace is benefiting from the rising tide that is propelling the valuation of cloud stocks.
  • Its large enterprise focus has the potential to trigger liquidity worries. This also factors the shift from perpetual licensing which impacts bookings.
  • The Street is overlooking the potential near-term billings/bookings weakness given the swoosh-shaped market recovery.
  • If the potential billings/bookings weakness leads to less capital deployed to drive growth, a lower than expected earnings result could provide a cheaper entry point for a value hunter from a post-earnings dip.
  • Dynatrace's conservative earnings guidance has factored in the potential earnings weakness due to COVID-19. Nevertheless, long-term investors should anticipate more volatility.

Source: Aithority

Dynatrace (NYSE:DT) is enjoying favorable demand-side tailwinds. It needs to move as fast as competitors to continue to enjoy the extra support from its profitability factor, which will be boosted by cross-selling its new offerings. This will lead to DT deploying more capital to drive its new products. The weakness of the sharing economy also impacts growth. Valuation is in line, and investors should adopt a long-term strategy before initiating a position.

Demand (Rating: Bullish)

Global Reach-Observability-ARR-DBNER-RPO-ACV

"The APM market is one of the largest sub-segments of the ITOM market, with forecast spending in 2020 of $4.48 billion and an 11.1% CAGR through 2023."

Dynatrace is maintaining its leadership position in the observability space. Dynatrace's global reach is benefitting from the growth of mobile apps, the adoption of multi-cloud observability platforms, and the growing work-from-home trend. Demand for its observability platform is benefitting from the need for app reliability tools, ease of integration with other platforms, and data growth.

The growth metrics reported last quarter were solid. ARR grew by 42% (y/y). Reporting ARR puts all investors on an equal footing with regards to growth expectations. Dynatrace is in the final stage of the shift from perpetual licensing to subscription billing. Reporting ARR also helps algos and APIs bake in the right expectations into their models.

Dynatrace expects more customers will expand ACV with time. Most enterprises start with an ACV of $100k. Growing ACV is a logical next step to optimize its cost of capital. Its large enterprise focus will support ACV. ACV will also be supported by its best-of-breed observability platform, which includes capabilities in logging, infrastructure, digital experience, and automation.

Subscription and service revenue grew 37%. While subscription revenue will keep growing, service revenue will decrease. This is attractive because the service segment is a low margin business

This article was written by

Kayode Omotosho profile picture
Kayode's strategy aligns only with businesses that have competitive moats, solid financials, good management, and minimal exposure to macro headwinds.-------------------------------------Coverage tilted towards tech stocks (IoT, Cybersecurity, Cloud, DevOps, Data management)

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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