Summary
- Dynatrace has one of the newest and most efficient software-intelligence platforms in the industry, created to address hybrid multi-cloud, serverless, micro-services, and container environments.
- It is well-positioned to grab market share in the fast growing and fragmented monitoring market (applications, infrastructure, network, user experience, and logs) that is consolidating to a single tool.
- We expect the company to grow north of 20%+ for the next three years at a minimum, the net expansion rate to remain 120%+, and margins to expand via leverage.
- Estimates are conservative and we expect beats and raises to continue.
- Buy the stock opportunistically on any weakness, given the lofty valuation.
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Digital transformation trend to drive Dynatrace's growth
Digital transformation (DX), which Dynatrace (DT) makes easy to manage, is a major, long-term information technology (IT) trend. Benefiting from this trend, DT is a long-term buy in our analysis.
Digital Transformation, a top priority of CEO/CIOs, is increasing the complexity of IT infrastructure. Enterprises are now running applications in multiple public clouds such as Amazon AWS, Microsoft Azure or Google GCP, in private clouds such as Salesforce/Veeva, and on premises-based data centers, simultaneously, creating an infrastructure sprawl. This infrastructure sprawl creates complexity and troubleshooting problems as they come up, a major challenge for IT administrators. Adding to this, new technologies such as containers, micro-services, and serverless computing increase the complexity. Performance monitoring solutions built to address legacy workloads and premise-based data centers do not work in a hybrid cloud and container world, which was the case with Dynatrace's previous software monitoring tools.
To tackle hybrid cloud and containers, Dynatrace took about four years to re-write its entire software stack and launched a new version in 2016. Gartner considers this new version of software the best in the industry and not surprisingly enterprise customers are embracing it. Dynatrace software offers a unified solution to monitor applications, infrastructure, and user experience in addition to Artificial Intelligence for IT Operations (AIOps) and business analytics. The following chart illustrates the breadth of the software offering from Dynatrace.
Source: Dynatrace S1
Why Dynatrace now?
Dynatrace is best positioned to benefit from Digital Transformation, accelerated greatly by COVID-19. As more employees work from remote settings, enterprises are increasing the use of public cloud providers, in addition to applications hosted in the cloud such as Workday, Veeva and Salesforce etc. Dynatrace software monitors the entire stack where ever located, with Artificial Intelligence (AI) and Automation, to ensure systems run as expected, and deliver outcomes as expected. With the advent of micro-services, serverless and container technologies, the complexity of enterprise software has increased exponentially.
Making sense of data and deriving answers to performance problems in real time is very important for an enterprise. Monitoring problems after they occurred are expensive to trouble shoot. Dynatrace built a new software stack that not only gathers data continuously but makes sense of the data and provides answers before problems impact the systems and the business. Some of the largest enterprises in the world currently use Dynatrace to monitor their enterprise stack.
