App Monitoring Software Maker Dynatrace Rides Cloud Computing To IPO
12/03/2019 IBD
Went public Aug. 1 at 16 a share and hit intraday high of 27.48 a week later
Shares currently in a cup formation with stock nearing entry point of 27.58
Depth of cup formation was 38%, but IPO came during a market correction
Composite Rating 64/99
Dynatrace (DT) is the IBD Stock of the Day, as its path to Wall Street owes much to the rise of cloud computing, not to mention a buyout five years ago that ultimately led to its creation and the recent initial public offering of Dynatrace stock.
Though Dynatrace stock has a short history on the public markets, the company has a fairly lengthy record in the so-called application performance monitoring, or APM, market. Waltham-Mass.-based Dynatrace has been around long enough to lead the APM market with around 13% share, followed by Cisco Systems (CSCO) at 12%, New Relic (NEWR) at 11% and Splunk (SPLK) at 6%, according to a Jefferies report published in August.
Dynatrace's roots were in supporting a customer's internal, on-premise infrastructure, offering software tools that measure and analyze the performance of business-critical applications. Unlike some legacy APM players, though, Dynatrace migrated its software tools to a cloud-computing platform.
With competition on the rise, supporting both on-premise and cloud-based APM gives Dynatrace a broader appeal to customers, analysts say. It's steadily converting on-premise customers to subscription-based cloud products.
William Blair analyst Bhavan Suri says the APM market has shifted to cloud-computing specialists.
"Although traditional APM is an established category, the broader category of intelligent software monitoring is much newer and addresses the complexities associated with cloud-based applications," he said in a recent report to clients. "The high cost of legacy solutions and their inability to address the complex cloud-stack environments has resulted in only about 5% of applications/environments being monitored today."
Dynatrace Stock: How Customers Are Warming Up
Chief Executive John Siclen offered an example of a converting customer during the company's quarterly earnings call in October. He said a Fortune 100 brick-and-mortar retailer and customer of the company's classic product set signed a mid-six-figure contract to convert to the Dynatrace software intelligence platform "with plenty of opportunity to grow in the multiple seven figures over time as they expand their cloud initiative."
Said Siclen: "Previously, the customer had a low urgency to change as our classic offering was serving their needs well for current enterprise applications. But when new management came on board and prioritized digital transformation, their needs and urgency quickly changed."
Dynatrace, which held its IPO Aug. 1, competes with AppDynamics, acquired by Cisco in 2017, as well as New Relic and Splunk. Other rivals include Datadog (DDOG), also a recent IPO stock to watch, as well as feisty startups such as SignalFX, recently acquired by Splunk. It also targets the customers of IBM (IBM), BMC Software, CA and others.
The market is getting crowded, analysts say, as Dynatrace and its rivals aim to take advantage of corporate America's shift to cloud computing. That includes moving business workloads and apps to internet data centers.
No Newcomer To APM
More than 14 years old, Dynatrace isn't a newcomer to the APM market. Compuware acquired Dynatrace in 2011 for around $250 million from a group of venture capital backers. Then private equity firm Thoma Bravo, a specialist in technology and software companies, bought Compuware for $2.4 billion in 2014.
In the September quarter, Dynatrace already was reporting a profit. Its year-over-year earnings grew 100% to 6 cents per share on a 27% increase in revenue to $129.4 million. Subscription revenue rose 41% to nearly $116 million.
The APM market will grow at a five-year annual compound rate of 12% to $5.6 billion in 2022. That's up from about $3.8 billion in 2018, says research firm Gartner.
Dynatrace has aimed to set itself apart with artificial intelligence tools that provide real-time analysis. Its software also automates cloud operations. One goal for clients is developing and releasing software faster.
Dynatrace says it has more than 2,300 customers in more than 70 countries. They're in diverse industries such as banking, insurance, retail, manufacturing, travel and software. Dynatrace's customers include Royal Caribbean, Kroger, Experian, Air Canada and Daimler.
Dynatrace IPO Raised $570 Million
The Dynatrace IPO raised $570 million. Dynatrace stock opened at 16 a share and closed its first day of trading at 23.85, up 49%. The stock hit an intraday high of 27.48 on Aug. 8.
But gains proved to be short-lived as Dynatrace stock hit a low of 17.25 on Oct. 16 before rebounding.
Having formed a bullish cup chart pattern in mostly low volume trading, Dynatrace stock ended trading Tuesday at 27.02, roughly 2% below an entry point of 27.58. It should be noted the cup formation had a depth of roughly 38%, putting it uncomfortably close to the 40% threshold, but Dynatrace came public during the summer market correction.
Holders of Dynatrace stock include a number of highly rated funds. Investors, though, should be aware that Thoma Bravo could reduce its stake or exit entirely in future secondary offerings.
In addition, investors should tread cautiously since IPOs can be volatile and have a shorter chart history to scrutinize.
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