Dynatrace Inc: Will This Pandemic-Proof Tech Stock Soar to New Highs?

Dynatrace Stock Deserves a Serious Look

People who want to own recession-proof stocks tend to invest in boring industries like consumer staples. But due to the nature of the recent economic slowdown caused by the COVID-19 pandemic, the technology sector has produced many winners.

Check out Dynatrace Inc (NYSE:DT), for instance. The Waltham, Massachusetts-based software intelligence company is not exactly a well-known name to the public. And yet, DT stock is up more than 60% year-to-date, handsomely outperforming the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite.

And if you take a look at what the company has been doing, you’d see that there are plenty of reasons for investors to continue liking Dynatrace stock.

You see, it’s currently earnings season for the second quarter of 2020. Because of the timing of the COVID-19-related business closures, a lot of companies have been reporting substantial sales and profit declines for the quarter.

Dynatrace Inc, though, is not one of them. On July 29, the company reported its financial results for the three months ended June 30, 2020—the first quarter of its fiscal-year 2021.

The report showed that Dynatrace generated $155.5 million of revenue during the quarter, a 27% increase year-over-year. On a constant-currency basis, the company’s top-line growth was 30%. (Source: “Dynatrace Reports First Quarter of Fiscal Year 2021 Financial Results,” Dynatrace Inc, July 29, 2020.)

The bottom-line result was even more impressive. For the quarter, Dynatrace Inc earned a non-generally accepted accounting principles (GAAP) net income of $0.13 per share, marking a huge improvement from the $0.04 per share from the year-ago period.

In recent years, a lot of software and services firms have been trying to move their business model from traditional licensing sales to subscriptions. The reason is that subscriptions tend to be recurring. In the fast-changing tech world, who doesn’t want to generate recurring revenues?

The good news is, Dynatrace Inc has already successfully transitioned into a subscription business.

Consider that, in the company’s fiscal-year 2018, 65% of its total revenue came from subscriptions. In Dynatrace’s fiscal 2020, subscriptions accounted for 89% of total revenue. (Source: “Business Overview May 2020,” Dynatrace Inc, last accessed August 3, 2020.)

Mind you, it’s not just the share of subscription revenue that has increased, but the absolute amount as well. In Dynatrace’s fiscal 2018, its annualized recurring revenue was $280.0 million. By fiscal 2020, the amount more than doubled to $573.0 million.

And that growth momentum in subscriptions has continued to this day, despite the impact from the COVID-19 pandemic.

In the first quarter of Dynatrace’s fiscal-year 2021, its annualized recurring revenue was $601.4 million, another 37% increase year-over-year. Excluding exchange rate headwinds, growth in annualized recurring revenue would be 39%. (Source: Dynatrace Inc, July 29, 2020, op. cit.)

The reality is that, even though DT stock is not the hottest ticker, the company is absolutely firing on all cylinders. The number of customers on Dynatrace’s platform more than quadrupled from the company’s fiscal 2018 to fiscal 2020. (Source: “Business Overview May 2020,” Dynatrace Inc, op. cit.)

Among its customers are leading players from a wide range of industries, such as retail giants Walmart Inc (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST); insurance behemoths GEICO and Allstate Corp (NYSE:ALL); human capital management leader Automatic Data Processing Inc (NASDAQ:ADP); and automakers Toyota Motor Corp (NYSE:TM) and Daimler AG (OTCMKTS:DMLRY, FRA:DAI).

As you’d expect, acquiring new clients in the June quarter—when many businesses were closed—was quite challenging.

At the end of July, Dynatrace Inc’s Chief Financial Officer Kevin Burns said,

We added 85 net new customers in Q1, bringing our total Dynatrace customer count to 2,458 customers. As expected, the combination of our increased focus on our install base coupled with a more challenging business environment led to a moderation in new additions to the Dynatrace platform in the first quarter.

(Source: “Dynatrace, Inc. (DT) CEO John Van Siclen on Q1 2021 Results – Earnings Call Transcript,” Seeking Alpha, July 29, 2020.)

However, Burns remains confident about expanding the company’s customer base in the full year: “We have a solid pipeline of new logos for the second quarter and we believe new logo adds will be roughly 450 for the remainder of this year…” (Source: Ibid.)

And the best could be yet to come.

For the September quarter, management expects Dynatrace Inc to generate between $159.0 and $161.0 million in total revenue, which would represent a 25% to 26% year-over-year increase on a constant-currency basis. Subscription revenue, the key to having a recurring business, is projected to surge 30% to 32%.

Dynatrace Inc (NYSE:DT) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

At the end of the day, keep in mind that tech stocks are known to be volatile, and pullbacks often happen after a massive rally.

However, if Dynatrace Inc can continue growing its business at an impressive clip, it could lead to more investors warming up to DT stock.