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Why Dynatrace Stock Jumped 35% Through the First Half of 2021

What happened

Cloud observability software leader Dynatrace (NYSE: DT) jumped 35% higher through the first half of 2021, according to data from S&P Global Market Intelligence. The company's annual recurring revenue (ARR, the annualized value of sales from a single quarter) increased 35% year over year to $774 million during its fiscal 2021 fourth quarter (the three months ended March 31, 2021). With management indicating it thinks it can sustain at least a 30% growth rate for the foreseeable future, shares rocketed higher in response.

So what

Global cloud computing software spend is going to mop up some $330 billion this year, according to tech researcher Gartner. The industry overall should reach $1 trillion a year in short order as IT quickly adopts the new operating model. Cloud-based systems are flexible, easy-to-deploy to devices, and help unlock new efficiencies for businesses making the upgrades.

Image source: Getty Images.

However, the cloud also presents new challenges. There are massive amounts of data moving through modern data centers, and deciphering any problems is becoming an increasingly impossible task. That's where Dynatrace comes in. Its software helps automate the observation of cloud systems and uses AI to recommend fixes and performance improvements to IT teams. It's also extended its capabilities with a new module that embeds security directly into a cloud application.

Besides the robust growth it posted in the last year, this is also a highly profitable software firm. Dynatrace generated free cash flow of $206 million in fiscal 2021, and had a healthy free cash flow profit margin of 29%.

Now what

Dynatrace has had a turbulent history. It was part of tech conglomerate Compuware when it was acquired by private equity firm Thoma Bravo in 2014. Thoma Bravo decided to spin off Dynatrace as its own stand-alone entity in 2019, laden with ample debt (Dynatrace's balance sheet had cash and equivalents of $325 million, offset by debt of $392 million, as of March 31, 2021).

But Dynatrace has been rapidly paying off liabilities (indebtedness is down $118 million in the last year alone) and is benefiting from the rapid transformation of the tech world to cloud computing. Dynatrace focuses its attention on the largest enterprises in the world, but has barely scratched the surface marketing itself to these big and complex organizations. Generating ample cash every quarter to fund its ambitions, the company's stated goal of 30% annual growth looks like an achievable one in the years ahead.

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Nicholas Rossolillo owns shares of Dynatrace Holdings LLC. His clients may own shares of the companies mentioned. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.


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