Why Dynatrace Is An Excellent Long-Term Buy

seekingalpha04-18

Dynatrace is ranked as the highest leader in application process monitoring and observability by Gartner.The APM and observability market has a large and growing TAM, with significant growth potential...

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Monitoring of applications delivered from several sources. Complexity of data with continued cloud migration. Integration with tools from major public cloud providers such as AWS, Azure and Google Cloud. Gauging the impact of application performance problems on business. The immediate need to triage data breach issues and breaches. Analysis and inference of data. Solving the coalescence problem – getting data to speak to each other.  The proliferation of data, the increased mobility to cloud infrastructure, the need for security and management of disparate data silos is a gargantuan task, and what’s more it keeps growing. Data management is going to get even more crucial with the massive data surges from AI, machine learning and large language models. Key competitive advantages and strengths FSMA: Dynatrace pos","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU1571399168.USD":"ALLSPRING GLOBAL LONG/SHORT EQUITY \"IP\" (USD) ACC","BK4525":"远程办公概念","LU1599440770.SGD":"FIDELITY GLOBAL DIVIDEND \"A\" (SGDHDG) INC","BK4533":"AQR资本管理(全球第二大对冲基金)","BK4535":"淡马锡持仓","DDOG":"Datadog","LU0234570918.USD":"高盛全球核心股票组合Acc Close","BK4527":"明星科技股","LU1244550494.USD":"FRANKLIN GLOBAL MULTI-ASSET INCOME \"A\" (USDHEDGED) ACC","LU1506573853.SGD":"MANULIFE GF GLOBAL EQUITY \"AA\" (SGD) INC","BK4020":"通信设备","BK4550":"红杉资本持仓","BK4588":"碎股","BK4579":"人工智能","BK4551":"寇图资本持仓","BK4561":"索罗斯持仓","IE00BSNM7G36.USD":"NEUBERGER BERMAN SYSTEMATIC GLOBAL SUSTAINABLE VALUE \"A\" (USD) ACC","SG9999002232.USD":"Allianz Global High Payout USD","LU0234572021.USD":"高盛美国核心股票组合Acc","BK4581":"高盛持仓","BK4560":"网络安全概念","LU1585245621.USD":"EASTSPRING INV GLOBAL LOW VOLATILITY EQUITY FUND \"A\" (USD) ACC B","SG9999002224.SGD":"Allianz Global High Payout SGD","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","BK4548":"巴美列捷福持仓","LU1066051498.USD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM2\" (USD) INC","CSCO":"思科","LU1430594728.SGD":"Eastspring Investments - Global Low Volatility Equity AS SGD","LU1066053197.SGD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM3\" (SGDHDG) INC","SG9999001424.SGD":"United E-Commerce Fund SGD","LU1059921491.USD":"NORDEA 1 GLOBAL STABLE EQUITY \"HB\" (USDHDG) ACC","BK4528":"SaaS概念","BK4023":"应用软件","LU0868494617.USD":"UBS (LUX) EQUITY SICAV - US TOTAL YIELD SUSTAINABLE \"P\" (USD) ACC","LU1244550221.USD":"FRANKLIN GLOBAL MULTI-ASSET  INCOME \"A\" (USDHEDGED) INC (M)","BK4515":"5G概念","LU1244550577.SGD":"FTIF - Franklin Global Multi-Asset Income A (Mdis) SGD-H1","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","LU2286300806.USD":"Allianz Cyber Security AT Acc USD","BK4534":"瑞士信贷持仓","LU0731783394.SGD":"Fidelity Global Dividend A-MINCOME(G)-SGD","BK4585":"ETF&股票定投概念","SG9999001440.SGD":"United Global Dividend Equity Fund A SGD Dist","DT":"Dynatrace Holdings LLC"},"translate_title":"为什么Dynatrace是一个很好的长期投资对象","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DT":1,"DDOG":1,"CSCO":1},"content_text":"Dynatrace is ranked as the highest leader in application process monitoring and observability by Gartner.The APM and observability market has a large and growing TAM, with significant growth potential.Dynatrace's Full-Stack Monitoring & Analysis integrated service is a major competitive advantage.The stock is currently 25% below its 52-week high and is a solid investment opportunity with years of secular growth ahead.   Galeanu Mihai Dynatrace (NYSE:DT) is the best in class and highest ranked leader by Gartner in the application process monitoring, APM and observability space. Last April, I had written about closest competitor Datadog (DDOG), recommending buying the stock on declines only, as I felt it was overpriced at that time, as was Dynatrace in my view. I did subsequently buy Datadog and still own it. I bought Dynatrace in March 2024, 25% below its 52-week high of $61 - it looks like a solid investment at these levels. It isn't cheap at 9.5x sales with a sales growth of 23% in 2024 - the price to sales growth ratio is 0.41, above my usual cap of 0.3. Given rising bond yields, the 10 year is at 4.69% and the seeming reluctance of the Fed to cut rates in the face of stubborn inflation, I believe that the stock could easily fall another 10 to 15% as long duration tech growth stories usually do when interest rates go north or remain high. I will continue to accumulate as the price falls. In my April 2023, Datadog article I had mentioned that the APM and observability market had a large and growing TAM, (Total Addressable Market). Datadog and SIEM leader Splunk, now taken over by Cisco, (CSCO) forecasted $62Bn and $100Bn as their TAM's in their respective investor presentations in 2023. Dynatrace too forecasts a $50Bn addressable market and at $1.4Bn in sales has only a tiny portion of it. Similarly, Gartner also sizes the TAM at $51Bn with a CAGR of 11% through 2027.   Observability TAM (Gartner) Clearly, this sector has a lot going for it. Why are the APM and observability markets so important? These are the main reasons to have a strong, well-integrated APM and observability platform/service and also major catalysts for future growth.  Monitoring of applications delivered from several sources. Complexity of data with continued cloud migration. Integration with tools from major public cloud providers such as AWS, Azure and Google Cloud. Gauging the impact of application performance problems on business. The immediate need to triage data breach issues and breaches. Analysis and inference of data. Solving the coalescence problem – getting data to speak to each other.  The proliferation of data, the increased mobility to cloud infrastructure, the need for security and management of disparate data silos is a gargantuan task, and what’s more it keeps growing. Data management is going to get even more crucial with the massive data surges from AI, machine learning and large language models. Key competitive advantages and strengths FSMA: Dynatrace positions and differentiates itself as a Full-Stack Monitoring & Analysis provider, the one stop shop for the entire IT stack. This entails monitoring the performance of each software or application of the vendor, its client facing platforms, its databases and its architecture. The service also involves getting meaningful inferences, analysis and solutions; otherwise it’s like the auditor who tells you what’s wrong with your books but doesn’t suggest ways to fix it. Integrated services and a single solution are a strong selling point because software and IT stacks have been built with separate vendors and platforms over time, many have been patched together, so many are a result of mergers and acquisitions, some are built because of internal turf wars -- so there is a serious need for software to talk to each other for any meaningful analysis. Dynatrace started with this approach, and they only target about 15,000 of the world’s largest companies with IT budgets of $1Bn, with complex IT needs, with different infrastructures, including on premise data centers, cloud platforms and hybrid environments. Large companies need a strong FSMA vendor to address all these environments and as we see from Gartner's quadrant below, Dynatrace is the best in class integrated provider to take care of the complex problems. Dynatrace had only 3,600+ customers as shown on their website in May 2023, which suggests that at that time, they had at most managed to penetrate 24% of their target market of 15,000 companies. There is a long runway of growth still left. Datadog and Splunk are strong competitors too but the given the size and growth of the market, there will be room for several competitors. Large contracts: The big competitive advantage of being an FMSA vendor, integrating and standardizing monitoring frameworks across the entire company's IT stack means big bucks from large contract sizes. Based on 3,600 customers for Dynatrace, that’s an average annual revenue of $323,000 per customer (1.16Bn of FY2023 revenues/3,600). Comparatively, Datadog’s average revenue is $80,000 per customer per year. Switching costs: The complete integration across the customers' IT stack creates the inevitable switching costs for the client to change to a competing provider. The cost benefit to the client is high by having one vendor – there are efficiencies created across the client, which mitigates the pain of locking in to one vendor. Best in class product: Dynatrace is the highest ranked leader by Gartner in the application monitoring and observability space as shown below. Being a leader in its field, and given the importance of APM, engineers prefer the best product, with less emphasis on price. I believe that this strength will allow it to get continued support from engineering departments in bigger companies with big budgets. Dynatrace has chosen its niche well and tailored its product to serve this high-end segment and establish market and product leadership in it.   Magic Quadrant for Application Performance Monitoring and Observability (Gartner) Additionally, monitoring includes cybersecurity components, which increase its importance as a must have. Land and expand. Dynatrace's product strengths allow it to land and expand, which shows in their Dollar based net retention rate of 113%. Furthermore, again because of security concerns customers don’t switch easily, they don’t want to lose mission critical data. Dynatrace has a gross retention rate in the mid-nineties. Growth from Grail and Davis: Gartner has rated their new centralized data platform Grail as a key strength because of its proactive efficiency in performance analysis and remediation. Grail could be the spearhead for Dynatrace's growth, with strategic partnerships with the big 3 cloud providers, AWS, Azure and Google Cloud. Similarly, its AI offering, Davis, which is still in early deployment has features likely to best competitors or at least give it a first mover advantage in AI. Davis will likely have meaningful revenue accretion only in 2025. Risks and weaknesses Niche Market: The smaller Dynatrace will have a harder time growing its market than its competitors like Datadog– its exposure to the somewhat elitist high end of the market restricts its growth. In the last six years, the smaller Dynatrace has grown sales at 19%, so much slower than Datadog's 66%, and even Splunk's 22%. It's not just fewer customer adds, it’s the longer sales cycles, the higher sales and marketing expenses and the uncertainty of clients' postponing budgets and Dynatrace not meeting quarterly guidance, which takes the inevitable on its stock price. Dynatrace has priced itself out of the SMB, small and medium size business market that doesn't have the need for complex data analysis and monitoring. Consumption and price vulnerability: One of the complaints from a dev-ops manager I spoke to said that clients often get overcharged for the same data ingestion and analysis, basically charging clients for doing essentially the same tasks. Gartner mentioned it in its report on observability, that Datadog was allegedly vulnerable to potential complaints for costs spiraling out of control as usage grew and Dynatrace was vulnerable to their newly introduced hourly pricing model, which could lead to clients re-assessing their budget and spend. Key competitor Datadog   Dynatrace Competitors (Dynatrace, Datadog, Seeking Alpha, Fountainhead) As we can see from the table above, for the most part, it’s a close call and while Datadog is top dog in revenue growth at 26%, it's also valued at almost twice as much at 16x sales compared to 9x sales for Dynatrace. And growth is easier when your customer size is much lower; Datadog sells an average of $82,000 per year per customer, Dynatrace has a harder time landing a $323,000 customer so I expect the growth to stay significantly lower. But the margins tell a different story, an integrated FMSA should earn better profits and Dynatrace gets 27% of adjusted operating profits compared to 23% for Datadog. Dynatrace also scores higher in earnings valuation with a lower P/E of 32 as compared to 89 for Datadog, with a much lower PEG of 1.69 to 3.72, -- it is a much better bang for the buck, The $ based Net Retention Rates are about equal, at 113% V mid 110% as are the gross retention rates. Both do well in landing and expanding and retaining customers. I'm glad I own both, but from their PEG and PS/G ratios I would expect a better return from Dynatrace. Keep accumulating Dynatrace Dynatrace Financials (Dynatrace, Seeking Alpha, Fountainhead) The valuation and metrics are very good from the high gross margins of 84% to the free cash flow margin of 24%. I've taken a conservative approach to earnings and expect to be surprised with better margins. Sales and marketing expenses are key to Dynatrace's success, landing a customer with a $1Bn IT budget necessitates higher sales and marketing spend, plus longer sales cycles, but with higher revenues Dynatrace should be able to spread these fixed costs better. Management has guided to 200 basis points better operating margins to 27% for FY2024, and I would expect this to improve further. There is room for further gross profit expansion as well, adjusted gross profit margin was 85% in FY2022, so a 100 basis point increase could help the bottom line even more. As I mentioned earlier, the high P/S is a bit of an obstacle but not a deal breaker, this rapidly drops to 6.7 in two years. The total of operating profit margins and sales growth = 27%+23% = 50%, a lot higher than the rule of 40, a threshold I like to cross before investing, and at 50% affords an extra margin of safety. Besides, Dynatrace's PEG ratio (based on adjusted EPS) also drops from 1.8 to 1.2. Dynatrace has not benefited from the rise in the markets, it's up only 5% in the past 12 months, compared to 82% for Datadog.  Even though I expect the rest of 2024 to sluggish, because long duration tech doesn't do well with rising interest rates, there is far more upside than downside in my opinion; I can't see it below $37-$40, or another 10 to 15% lower. I recommend buying the stock, while dollar cost averaging on declines for the following reasons:  Best in class in the APM and Observability space. Decent moat as a FSMA provider. Constant and secular growth in data monitoring necessitating a strong integrated provider for assimilation, inference, analysis and solutions. Strong operating and financial metrics with scope for more operating leverage.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428372552"}