Dynatrace, Inc. (DT) in Waltham, Mass., is a software intelligence platform that is designed to support dynamic multi-cloud environments. DT aims to simplify cloud complexity and accelerate digital transformation through its automatic and intelligent observability at-scale all-in-one platform. However, the company has an ISS Governance QualityScore of 7, indicating relatively high governance risk.

For its fiscal year 2022 third quarter, ended Dec. 31, 2021, DT’s total revenues increased 32% year-over-year to $241 million. DT surpassed the $234.50 million consensus revenue estimate by 2.7%. This can be attributed to a 33% rise in subscription revenues. However, the company’s net income declined 26.2% from the same period last year to $14.59 million. And its EPS fell 16.7% versus the prior-year quarter to $0.05.

In the wake of its disappointing third-quarter earnings report released on February 2, DT’s shares have declined 16.8% in price. Moreover, the stock has declined 21.8% year-to-date.

Click here to check out our Software Industry Report for 2022

Here is what could shape DT’s performance in the near term:

Stable Growth Prospects

Analysts expect DT’s revenues to rise 25.5% in its fiscal 2022 fourth quarter (ending March 2022), 25.1% in the next quarter (ending June), and 31.3% in the current year. The consensus EPS estimates indicate 1.9% growth in the current quarter, a 7.7% rise in the next quarter, and a 6.3% improvement in fiscal 2022. In addition, the Street expects DT’s EPS to grow at a 14.9% rate per annum over the next five years.

Frothy Valuation

In terms of forward non-GAAP P/E, DT is currently trading at 70.47x, which is 214.7% more than the 22.40x industry average. And its 5.40 forward non-GAAP PEG multiple  is 246.8% higher than the 1.56 industry average.

In addition, the stock’s 14.60 and 48.67 respective forward Price/Sales and Price/Cash Flow ratios are significantly higher than the 3.78 and 21.86 industry averages. Also, DT’s 54.41 forward EV/EBITDA multiple compares with the 14.74 industry average.

POWR Ratings Reflect Uncertainty

DT has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a C grade for Growth and Stability. DT’s trailing-12-month revenues improved 32.8% year-over-year. However, the company’s trailing-12-month net income declined 21.3% from the same period last year, justifying the Growth grade. In addition, the stock’s relatively high 1.44 beta is in sync with the Stability grade.

Among 165 stocks in the Software – Application industry, DT is ranked #53.

Beyond what I have stated above, one can view DT ratings for Sentiment, Value, Quality, and Momentum here.

Bottom Line

Given increasing demand for automated software intelligence platforms, DT is expected to achieve stable growth over the long term. However, its lower-than-industry profit margins and stretched valuation are a cause for concern. DT’s 6.72% and 3.27% respective trailing-12-month ROE and ROA are slightly below the 8.29% and 4% industry averages. Also, given an impending interest rate hike, we think investors should wait until DT’s profit margins improve before investing in the stock.

How Does Dynatrace, Inc. (DT) Stack Up Against its Peers?

While DT has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Commvault Systems, Inc. (CVLT), SS&C Technologies Holdings, Inc. (SSNC), and Rimini Street, Inc. (RMNI), which have an A (Strong Buy) rating.

Click here to check out our Software Industry Report for 2022

DT shares were trading at $46.78 per share on Thursday morning, down $0.42 (-0.89%). Year-to-date, DT has declined -22.49%, versus a -3.92% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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