Dynatrace has had an impressive run over the past six months as its shares have beaten the S&P 500 by 20.4%. The stock now trades at $50.44, marking a 33.6% gain. This run-up might have investors contemplating their next move.
Following the strength, is DT a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Does Dynatrace Spark Debate?
With its platform processing over 30 trillion pieces of IT performance data daily, Dynatrace (NYSE:DT) provides an AI-powered platform that helps organizations monitor, secure, and optimize their applications and IT infrastructure across cloud environments.
Two Things to Like:
1. ARR Growth Powers Predictable Revenues
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Dynatrace’s ARR punched in at $2.14 billion in Q2, and over the last four quarters, its year-on-year growth averaged 18.2%. This performance was solid, reflecting the company’s ability to maintain strong customer relationships and secure longer-term commitments. Its growth also contributes positively to Dynatrace’s predictability and valuation, as investors typically prefer businesses with recurring revenue. 
2. Elite Gross Margin Powers Best-In-Class Business Model
What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.
Dynatrace’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 81.6% gross margin over the last year. Said differently, roughly $81.60 was left to spend on selling, marketing, and R&D for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Dynatrace has seen gross margins decline by 0.9 percentage points over the last 2 years, which is poor compared to software peers.
One Reason to Be Careful:
Operating Margin in Limbo
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Looking at the trend in its profitability, Dynatrace’s operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 12.1%.
Final Judgment
Dynatrace’s positive characteristics outweigh the negatives, and with its shares topping the market in recent months, the stock trades at 6.1× forward price-to-sales (or $50.44 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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