Shareholders of Dynatrace would probably like to forget the past six months even happened. The stock dropped 26.2% and now trades at $35.78. This might have investors contemplating their next move.
Following the drawdown, is now an opportune time to buy DT? 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 $560 million in Q4, and over the last four quarters, its year-on-year growth averaged 22.5%. This performance was impressive, 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
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 81.7% gross margin over the last year. Said differently, roughly $81.75 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 0.8 percentage points over the last 2 year, 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.
Analyzing the trend in its profitability, Dynatrace’s operating margin rose by 3.2 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 13%.
Final Judgment
Dynatrace’s positive characteristics outweigh the negatives. With the recent decline, the stock trades at 5.1× forward price-to-sales (or $35.78 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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