Citi bullish on Dynatrace stock eyeing 'go-to-market' strategy refinement

On Thursday, Citi adjusted its outlook on Dynatrace Inc. (NYSE:DT) stock, a software intelligence company, reducing the price target to $58 from the previous $68 while maintaining a Buy rating. The revision reflects a recalibration of expectations as Dynatrace navigates the challenges of increased variability in large deal closures and refines its go-to-market strategy under new sales leadership.

The firm's analysis follows discussions with Dynatrace's investor relations after the third fiscal quarter of 2024, but before the quiet period leading up to the fiscal year 2025/2026. Despite acknowledging positive industry trends such as technology consolidation and cloud adoption, the analyst noted a deceleration in top-line growth, from over 30% annual recurring revenue (ARR) in fiscal year 2022 to less than 20% in fiscal year 2024 estimates.

Dynatrace's net dollar retention rate (DNRR) has also shown signs of compression, which has contributed to investor dissatisfaction and sparked valuation debates. The company's growth trajectory is expected to be under 20%, which has led Citi to lower its terminal enterprise value to sales (EV/S) multiple to 8 times from a low-20s percentage.

The firm remains optimistic about Dynatrace's potential to scale its full-stack observability and monetization efforts. Despite the lowered future top-line and free cash flow (FCF) estimates, the analyst highlighted that Dynatrace's valuation is not significantly misaligned with that of its software peers when considering revenue growth and FCF parameters.

The reassurance from investor relations about the transformative nature of the go-to-market changes, along with stable feedback from field discussions, underpins Citi's decision to stay Buy-rated on the stock.

Analyzing the latest data from InvestingPro, Dynatrace Inc. (NYSE:DT) displays a strong financial position with a market capitalization of $13.32 billion, indicating its significant presence in the market. The company's gross profit margin is particularly impressive, standing at 82.54% over the last twelve months as of Q3 2024, which suggests efficient management and a competitive edge in its industry. This aligns with Citi's positive view on the company's ability to scale and monetize its full-stack observability offerings.

Moreover, with a P/E ratio of 66.81, the stock may appear to be trading at a premium; however, the PEG ratio of 0.12 suggests that the stock's price is reasonable relative to its expected earnings growth. This can be an attractive point for investors looking for growth potential in a company. Additionally, Dynatrace holds more cash than debt on its balance sheet, which is a reassuring sign of financial stability and flexibility. This further supports Citi's maintained Buy rating, as the company appears to be in a solid position to execute its refined go-to-market strategy.

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InvestingPro Tips indicate that Dynatrace is expected to grow its net income this year and analysts predict the company will be profitable. For those interested in deeper analysis, there are additional InvestingPro Tips available, which provide further insights into the company's performance. As a reader of this article, you can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, offering you access to valuable investment tools and data to inform your decisions.

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