Dynatrace: Fundamentals are Positive While Being Punished — Schaeffer’s Investment Research

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Dynatrace’s Impressive Q4 Earnings

Dynatrace, (NYSE: DT) is a victim of its own success. The stock’s revenues and share price were trending higher and higher quarter to quarter. Nothing looked to be able to stop it from reaching a new ATH and then some, which was until the market decided it was too expensive and has taken it for a ride towards the bottom ever since. It should also be noted that the market has moved along with it, and with Dynatrace being a tech stock, it has faced additional prejudice. The stock now is struggling to recover lost ground but its technicals just aren’t holding up. Dyntrace is currently down -44.67% YTD and is currently trading 48.69% below the MarketBeat consensus price target.

Dynatrace’s Impressive Q4 Earnings

As a recent recurrent theme for Dynatrace, the company beat its EPS and revenue estimates by a convincing margin, but being a tech stock it is being punished for its industry. Dynatrace beat its Non-GAAP EPS by $0.02, finishing at $0.17. It also increased its revenues by 28.7% YoY, beating estimates by $6.31M and finishing at $252.85M. The company’s ARR was also impressive, with a total of $995 million, this figure also grew 35% YoY.

The company also posted a strong guidance outlook for the rest of the year. Dynatrace’s revenues are expected to grow between 24% to 26% while its non-GAAP net income per diluted share is forecasted to be $0.17 to $0.18.

Dynatrace Company Overview

The business that Dynatrace operates in is an interesting one. Dynatrace provides a monitoring platform that helps companies to reduce costs and improve efficiencies in cloud environments, which is enabled through an artificial intelligence engine.

One major difference that Dynatrace has over its cloud competitors is that the business has a solid track record of delivering solid free cash flow quarter-over-quarter. This is unlike some of the company’s major competitors such as Cloudflare, which has negative cash flow as it prefers to reinvest all of its income into its future growth. Dyntrace’s free cash flow TTM is $231.644M, and this is growing at a CAGR of 24.94%.

The final aspect that makes Dynatrace a strong company is its competitive positioning in three different supercycles in cloud computing. The first is digital transformation, which is being enabled through big data and artificial intelligence. The second and third are dynamic clouds and automation to help customers streamline processes and cut costs in their virtual architectures.

The Downsides of Dynatrace

Dynatrace also has its share of problems that it’s working through. The first is its amount of leverage. The company’s debt increased to $1.1B in three years, which is up from $430.12M. This amount of debt isn’t overly concerning, and it is good that management has addressed it in its earnings call and said that it will be reduced in the future.

The second matter of contention with Dynatrace is that its SG&A expenses are growing faster than its yearly revenues. Although the company’s free cash flows are strong now if expenses keep rising then this may cut into its operating margins and put pressure on this metric.

Dynatrace Is Disconnected From Its Fundamentals

As can be seen on the daily charts, Dynatrace’s share price is clearly headed for the downside despite consistently growing revenues. It has had a great couple of quarters, but the stock is not responding to the good news released in the earnings reports. Some analysts have posited that the reason for the stock’s slide is due to not meeting some metrics such as ARR or the fact that its leadership team is changing. My view is that the market has severely changed its risk appetite for technology stocks in general and that it is being punished for it.

Dynatrace’s short-term outlook does not look positive. The stock has bounced from oversold levels several times, and there is a flurry of trading happening on the daily candles this past week. The amount of activity recently is not surprising given the market conditions at present, and it looks like there is more downside to be had for this stock until the situation normalizes. Dynatrace is in a clear downwards trend, and there is more volume on the red candles than the green candles. This suggests that bulls are losing the tug-of-war match to keep prices higher, and that bears will eventually overcome them in the short term.

Originally published at https://www.schaeffersresearch.com on May 18, 2022.