Dynatrace (DT): Buy, Sell, or Hold Post Q2 Earnings?

Although Dynatrace (currently trading at $50.31 per share) has gained 8.3% over the last six months, it has trailed the S&P 500’s 22.9% return during that period. This may have investors wondering how to approach the situation.

Find out in our full research report, it’s free for active Edge members.

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 Things to Like:

1. Billings Growth Boosts 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 $388.2 million in Q2, and over the last four quarters, its year-on-year growth averaged 18.9%. This performance was solid, indicating robust customer demand. The 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 81.9% gross margin over the last year. That means Dynatrace only paid its providers $18.06 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 0.3 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 metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Analyzing the trend in its profitability, Dynatrace’s operating margin rose by 2.1 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 11.2%.

Final Judgment

Dynatrace’s merits more than compensate for its flaws. With its shares trailing the market in recent months, the stock trades at 7.5× forward price-to-sales (or $50.31 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free for active Edge members .

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