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After several years of a less-than-stellar bear market, cloud computing stocks are So The year is 2024. The technology has advanced rapidly in the first two months of this year, as hype about artificial intelligence (AI) accelerates.
But in reality, cloud software never really caught on. Global spending on cloud computing actually continued to increase throughout the past two years, when investor anxiety increased.And according to researchers gartnerEnd-user spending on cloud services is expected to reach $680 billion in 2024, up from an estimated $411 billion in 2021.
Although generative AI has been gaining traction for over a year now, “traditional” cloud services are actually still on the rise. And with all these new use cases comes the need to monitor and secure all IT processes.That’s why chip design companies broadcom A major cloud software management business just completed a major merger with VMware, so why the networking hardware giant? Cisco Systems Submitted a bid to purchase splunk Bet on cloud and network monitoring services.
This wave of cloud spending is benefiting smaller software companies, especially in the areas of security and analytics. And one of those companies has experienced steady and profitable growth since its initial public offering in 2019.
Cloud observations are increasing
Enter cloud observability and application performance monitoring (APM) stock dyna trace (DT -1.92%). Dynatrace sells cloud observability and security software to the world’s largest organizations. When compared to another startup in this market, data dog (NASDAQ:DDOG)started at the other end of its go-to-market strategy, offering cloud-based data analytics for small and medium-sized businesses. An old legacy player, Splunk got its start in the non-cloud era, and it’s only been in his last five years that he’s started to really push to modernize his software stack.
At the core of the Dynatrace service is observability and APM to discover bottlenecks, trouble spots, and security holes within computing systems. Dynatrace’s software (which has long relied on the AI assistant “Davis”) can recommend and automate fixes.
Dynatrace also just made a small acquisition of an AI startup called Runecast. Runecast helps customers with security and compliance for their hybrid cloud systems (using multiple public cloud services or a hybrid of public cloud and private data centers). Although the purchase is small, the management team is beginning to strengthen its financial strength.
In this new era of AI, many large organizations need to maintain their own apps built using their own data and data held privately in their own data centers. This gives Dynatrace’s flexible software suite an advantage. It excels in any IT environment, cloud or not, and especially for large and complex customers.
This explains why Dynatrace’s revenue has been slower (overall) than some of its competitors but steady, hovering around 20% plus or minus a few percentage points in any given quarter for the past few years. Because large enterprise customers will take longer to migrate, Dynatrace will also have to work on eradicating the in-house IT software solutions that many of its prospective customers have created themselves.
Data by YCharts.
Dynatrace is a profitable AI stock
Revenue for the last quarter (three months ending December 2023) was $365 million, up 23% year over year. It was a nice acceleration compared to the bear market of the past year and a half. His three-month-old guidance for Dynatrace was for ~21% growth.
The fourth-quarter outlook is for 18% to 20% year-over-year growth, but management teams often under-promise and over-deliver in the fashion of cloud software companies. But the real advantage is that Dynatrace is great. make a profit Growth by every metric over the past few years. Datadog is still working on that.
Last quarter, Dynatrace generated generally accepted accounting principles (GAAP) net income of $42.7 million (11.7% net margin) and free cash flow (FCF) of $67.4 million (18% FCF margin). . The FCF margin target for the full year is also trending around 20%, and this year’s FCF margin is expected to be 23%.
The stock currently trades at approximately 80 times trailing 12-month earnings per share (EPS) and 45 times trailing-12-month FCF. This is expensive, so the market is still clinging to this notion that cloud observability and his APM will be a high-growth software market that follows the general trend of global cloud spending overall.
One positive factor justifying the premium is that the company has a balance of $783 million in cash and short-term investments (up from $555 million at the end of fiscal 2023 last March), and a is zero.
However, to balance this promising growth business with a high premium price (which is sure to result in greater stock price volatility), I believe that a dollar-cost averaging plan is appropriate for DynaTrace, at least as far as my portfolio is concerned. I’m still thinking. The company is successfully implementing its growth strategy, and I am happy to be able to accompany it.
Nick Rossolillo and his clients hold positions at Broadcom and Dynatrace. The Motley Fool has positions in and recommends Cisco Systems, Datadog, and Splunk. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
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