Dynatrace has been treading water for the past six months, recording a small loss of 4.4% while holding steady at $53.95. The stock also fell short of the S&P 500’s 5.8% gain during that period.
Does this present a buying opportunity for DT? Or is its underperformance reflective of its story and business quality? Find out in our full research report, it’s free.
Why Do Investors Watch Dynatrace?
Founded in Austria in 2005, Dynatrace (NYSE:DT) provides companies with software that allows them to monitor the performance of their full technology stack, from software applications to the infrastructure they run on.
Three 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 $1.73 billion in Q1, and over the last four quarters, its year-on-year growth averaged 17.6%. 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 81.9% gross margin over the last year. That means Dynatrace only paid its providers $18.07 for every $100 in revenue. 
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Dynatrace has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 25.4% over the last year, quite impressive for a software business.
Final Judgment
Dynatrace possesses several positive attributes. With its shares lagging the market recently, the stock trades at 8.4× forward price-to-sales (or $53.95 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free.
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