Dynatrace trades at $45.15 per share and has stayed right on track with the overall market, gaining 5.9% over the last six months. At the same time, the S&P 500 has returned 8.4%.
Is DT a buy right now? Find out in our full research report, it’s free.
Why Does DT Stock 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 Positive Attributes:
1. Billings Surge, Boosting Cash On Hand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Dynatrace’s billings punched in at $849.1 million in Q1, and over the last four quarters, its year-on-year growth averaged 24%. This performance was fantastic, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth. 
2. Elite Gross Margin Powers Best-In-Class Business Model
Software is eating the world. It’s one of our favorite business models because once you develop the product, 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 81.7% gross margin over the last year. That means Dynatrace only paid its providers $18.27 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 0.8 percentage points over the last 2 years, which is slightly worse than average for software.
One Reason to Be Careful:
Operating Margin Rising, Profits Up
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 is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Looking at the trend in its profitability, Dynatrace’s operating margin rose by 1.6 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 12.2%.
Final Judgment
Dynatrace has huge potential even though it has some open questions, but at $45.15 per share (or 5.8× forward price-to-sales), is now the time to initiate a position? See for yourself in our full research report, it’s free.
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