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Digital transformation is fundamentally changing companies worldwide. Whether it's the use of the cloud, artificial intelligence, increasing automation, or growing demands for digital customer experiences—all of these factors are leading to increasingly complex IT landscapes. The challenge for companies now is to master this complexity. To analyze data volumes efficiently while ensuring security, performance, and user satisfaction. It is precisely in this environment that the American company Dynatrace (ISIN: US2681501092) positions itself as a leading provider of software intelligence platforms.
With its third-generation platform, which integrates AI-powered analytics, log management, and agent-based automation, it helps companies manage increasing complexity and accelerate digital innovation.
The business model is strongly focused on recurring subscription revenues, which ensures high predictability, stable margins, and robust free cash flow. Growth also remains sustainably high. Investors are celebrating the stock, whose stock price has more than doubled since its IPO in 2019.
Source: Dynatrace stock price
Opportunities arise here primarily in the long-term growth of a technologically leading company that benefits from key IT megatrends. At the same time, however, risks should also be taken into account, such as intense competition, possible delays in the introduction of new technologies, macroeconomic uncertainties, and regulatory or data protection requirements. Does the extremely favorable valuation already anticipate too much here? These are questions we want to address in today's Dynatrace stock analysis.
Founded in Linz, Austria, in 2005, Dynatrace is a leading provider of software intelligence platforms. These platforms help companies monitor and optimize the performance, security, and user experience of their digital systems. Put simply, the platform makes complex IT landscapes visible, measurable, and controllable, enabling problems to be solved more quickly, costs to be reduced more significantly, and innovation to be driven more efficiently.
Dynatrace was acquired by Compuware in 2011 and later floated on the stock exchange independently by financial investor Thoma Bravo. The now American company continues to offer solutions for monitoring applications, monitoring the entire IT infrastructure – both in the cloud and locally – and optimizing the digital user experience. Dynatrace's business model is based on recurring subscription revenues.
Software subscriptions ensure regular payments, usually monthly or annually. On the positive side, they offer a high degree of revenue predictability and ensure strong customer loyalty and scalable growth, as new features can be added to the platform without additional hardware. The downside, however, is that high costs are incurred initially, which are offset by low revenues for the time being. The lifetime value of the customer is therefore the main focus.
In addition, Dynatrace generates a smaller portion of its revenue through professional services such as consulting, implementation, and training. These services help customers make the most of the platform. However, this segment is relatively small and contributes only a small share of total revenue. In concrete terms, this means that today, around 96 percent of revenue comes from the subscription business, while services account for only around four percent. Subscriptions are clearly the growth drivers. They are the focus of the company's strategy, which is perhaps not such a bad thing. Such business models are well received on the stock market. Many software companies use them or are switching from license sales to SaaS.
Dynatrace benefits from long-term megatrends that are driving demand for software intelligence and modern monitoring solutions. For example, the ongoing digital transformation is forcing companies to modernize their IT systems and increasingly move them to the cloud or hybrid environments. However, it is precisely these developments that ultimately increase the complexity of IT landscapes. Powerful platforms for monitoring, analyzing, and optimizing applications and infrastructure are therefore becoming increasingly important. The importance of artificial intelligence and automation is also growing. Companies are increasingly turning to intelligent systems that independently identify problems, analyze causes, and recommend actions. Dynatrace also uses AI-powered analytics to proactively manage IT operations and accelerate decision-making. Another driver is the increasing relevance of digital customer experiences. Today's end customers expect fast, error-free, and intuitive applications. Companies that fail to meet these requirements risk losing revenue and damaging their reputation. This is exactly where Dynatrace comes in. It enables continuous monitoring and optimization of the user experience, allowing companies to ensure the digital quality of their products. Finally, there is also a growing focus on cybersecurity and data protection. With increasing connectivity and cloud usage, the risks of security incidents are also rising. Dynatrace helps companies identify security gaps early on and systematically reduce risks.
But the market is by no means simple. Companies are increasingly operating hybrid environments consisting of cloud solutions, on-premises systems, and containerized applications. This makes monitoring and optimizing performance, security, and user experience more challenging. In addition, the market is strongly influenced by network effects and platform dependencies. Since migration is complex, time-consuming, and costly, customers usually invest in only one monitoring platform for the long term. This creates high barriers to entry for providers. However, once you have a foot in the door with a customer, deep moats can develop.
Another characteristic is the increasing integration of artificial intelligence and automation. Here, too, the market demands solutions that not only collect data, but also analyze it intelligently (big data) and ultimately provide recommendations for action. Providers who offer this added value give their customers a clear competitive advantage. The market is also global and growing rapidly. It is driven by the ongoing digital transformation, increasing demands on digital customer experiences, and growing pressure on cybersecurity. At the same time, it is fragmented, as there are numerous specialized niche providers covering individual monitoring areas alongside leading platforms such as Dynatrace.
Direct competitors include New Relic, AppDynamics (a Cisco company), Splunk (also Cisco), Datadog, and, in some areas, Microsoft with Azure Monitor and Google (Alphabet) with Cloud Operations Suite. Among these stocks, Dynatrace is the clear underperformer, although its share price has risen by more than 100 percent since its IPO.
Source: Peer-Comparison
However, measured by sales growth, the stock is not performing too badly. Investors are particularly concerned about the slowdown in growth momentum.
Source: Revenue-Growth Peer Comparison
While some providers focus heavily on cloud monitoring or security features, Dynatrace stands out thanks to its fully integrated, AI-powered platform that offers end-to-end visibility across applications, infrastructure, and user experience. High automation, short implementation times, and the ability to efficiently monitor complex hybrid and multi-cloud environments are Dynatrace's strengths.
In the first quarter of 2026—ending June 30, 2025—Dynatrace delivered very strong results, once again exceeding all of its own forecasts. The big data company benefited in particular from a large number of seven-figure contract extensions and a significant acceleration in the adoption of its log management solutions.
Source: Financial Data
Specifically, revenue increased by 20 percent to US$477 million. EBITDA and EBIT rose disproportionately by 33 and 48 percent, respectively. Bottom line, net profit amounted to US$48 million, representing an increase of 24 percent over the same period last year.
Looking at the much more important metric of annual recurring revenue (ARR), dynamic growth is also evident here. The figure increased by 18 percent to $1.822 billion, although there was a slight headwind from currency effects. Adjusted for currency effects, the metric rose by only 16 percent. Nevertheless, the direction is right, and compared to the previous quarter, growth has even increased slightly.
According to CEO Rick McConnell, ongoing cloud modernization and the rapid adoption of artificial intelligence are driving a data explosion that is forcing companies to replace fragmented individual solutions with holistic observability platforms. With the third generation of its platform, based on Grail technology, Dynatrace believes it is ideally positioned to capitalize on this trend and provide customers with a robust, trustworthy foundation for the future of agent-based AI.
On the business side, Dynatrace further increased the number of large expansion deals, half of which involved extensive log management implementations. The flexible platform licensing model (Dynatrace Platform Subscription) is also gaining traction. This is a flexible licensing model for using the Dynatrace platform. Companies commit to a minimum annual revenue at the platform level and consume this volume according to their actual needs. Almost half of customers and more than 65 percent of recurring revenue are now based on this model.
Dynatrace has also made significant progress at the product level. The platform has been expanded to include new cloud-native, AI-powered, and log management capabilities. Particularly noteworthy are the general availability of the new Live Debugger, which provides real-time insights without disrupting operations, and the integration of so-called agentic AI capabilities that can proactively prevent problems, optimize resources, and adapt independently.
In addition, Dynatrace has further expanded its partner network. New collaborations with NVIDIA, Amazon, OpenAI, Google, Red Hat, and DXC underscore the company's growing importance in the field of AI-powered enterprise software. These partnerships are designed to help customers build their own AI infrastructure more efficiently and leverage the benefits of intelligent observability even more.
After a strong first quarter, Dynatrace is also optimistic about the rest of the year. Revenue of between $484 million and $489 million is expected for the second quarter, which would represent growth of around 16 to 17 percent compared to the previous year. As usual, the majority of this will come from the subscription business, which is expected to contribute between $464 million and $469 million in the same period. The operating margin remains at a very solid level of just under 30 percent.
However, Dynatrace is now forecasting total revenue of just under $2 billion for the entire 2026 fiscal year. This corresponds to growth of 16 to 17 percent, with the subscription business also almost entirely within this range. ARR, or annual recurring revenue, is expected to reach around US$2 billion by the end of the fiscal year. This new forecast is slightly above the previous expectations communicated by the company in May.
In addition, Dynatrace expects non-GAAP operating income of around $563 million to $573 million for the full year and free cash flow of around $505 million to $515 million, which corresponds to a fairly stable free cash flow margin of around 26 percent.
Source: Sales and Margin forecast
Looking further into the future, sales and profits could rise like clockwork. For example, analysts are forecasting sales of US$2.7 billion for 2028. Growth could remain in double digits through 2032, which is a positive for the stock. At the same time, synergies could emerge, gradually bringing the net margin closer to the 40 percent mark.
A glance at the key figures from the HGI analysis quickly shows that this is no longer a true high-growth stock. Growth over the last twelve months was too low at well below 20 percent. Nevertheless, it should be a solid growth stock from the technology sector, as evidenced by its steady growth alone.
Source: HGI Score
Above all, the stock qualifies due to its high profitability, low debt, and extremely favorable valuation. The profitable growth, which is quantified using the Rule of 40, is also positive. The HGI analysis already awarded one point for this. And if the analysts are to be believed, the margin situation could still improve significantly.
It is particularly striking that the stock scores full points in both the PEG ratio and the EV/sales multiplier. This could indeed indicate an extremely favorable valuation of the stock. More on this in the following chapter.
The valuation of Dynatrace shows that the stock is attractive compared to many other growth stocks in the technology sector, even though the company continues to grow strongly. A few examples: The expected price-earnings ratio (P/E) is around 30, which is relatively moderate for a company with expected revenue growth of around 20 percent.
Source: key metrics
Many pure growth stocks in the software and cloud sector are trading at P/E ratios of 40, 50, or even significantly higher multiples. The ratio of enterprise value to free cash flow (EV/FCF) is also around 29, which is similar to the P/E ratio. Last but not least, the ratio of enterprise value to revenue (EV/Sales) is expected to be 6.6.
All these metrics illustrate that investors are paying a moderate price for each dollar of revenue or free cash flow generated, given the growth potential—especially in light of Dynatrace's high profitability and strong, recurring revenue model. The high proportion of recurring subscription revenue, at 96 percent, is impressive. It increases the predictability of revenues and, in my opinion, reduces the risk compared to other growth companies. This increased predictability alone would justify a higher valuation. However, many investors do not seem to really appreciate this at present, instead focusing more on fast-growing – and in some cases even more unprofitable – cloud and AI companies.
Another point is the steadily slowing growth, which cannot be dismissed. A key reason for this could be the maturity of the core market for application performance monitoring and observability platforms. Many larger companies have already implemented monitoring solutions, so new customer business is naturally declining and growth is more dependent on expansion within existing customers. In addition, macroeconomic influences have an impact on companies' willingness to invest, particularly in the area of IT budgets. Economic uncertainty or higher interest rates can therefore lead to projects being postponed or budgets being allocated more restrictively. This always quickly dampens the revenue growth of software companies, but is usually only temporary. Finally, the integration of new, complex functions such as agentic AI and log management also requires time for implementation and customer training. Such innovation cycles can, of course, slightly slow down the growth of recurring revenues in the short term. However, they offer a clear competitive advantage in the long term.
Dynatrace is excellently positioned to benefit from the key megatrends of digital transformation—cloud, artificial intelligence, automation, and increasing demands on digital customer experiences. The growing complexity of modern IT landscapes makes powerful third-generation observability platforms such as Dynatrace's indispensable. Dynatrace's business model, which is primarily based on recurring subscription revenues, also provides tailwind. Most recently, these accounted for 96 percent of revenues. This structure ensures high predictability, stable margins, and robust free cash flow. At the same time, new features and partnerships are continuously being introduced to further increase growth and customer loyalty. The latest quarterly figures show no slowdown, but rather increasing momentum in the business. In the long term, double-digit growth could be very realistic.
What's more, the stock could still be fairly priced. An expected P/E ratio of around 30 is not much for an asset with predictable revenue growth. However, there are risks that should be taken into account. Competition in the observability and cloud intelligence sector is very intense, for example, and technological innovations must be successfully implemented. Not to mention the regulatory requirements in the area of data protection and the economic uncertainties that influence growth. Despite these factors, Dynatrace is well positioned to further expand its leading market position.
Source: Dynatrace target price
Among analysts, too, the majority (79 percent) recommend buying the stock. Only 21 percent vote to hold. No analyst advises selling. Interestingly, the price potential over one year is an attractive 33 percent. Whether this value can be achieved will ultimately depend on how Dynatrace performs in the future. However, if the current trend continues, I consider this to be extremely realistic.
From an investor's perspective, the stock could therefore be an interesting candidate—if you accept the existing risks. If you want to get an even bigger discount on the tech stock, you could set an alert in StocksGuide. A price alert of $44 is below the average price of the last five years and offers a risk buffer of a further ten percent.
The author and/or persons or companies associated with StocksGuide own or may own shares of Dynatrace. This article represents an expression of opinion and does not constitute investment advice. Please note the legal information.