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Why Dynatrace Stock Dropped Today

By Jeremy Bowman – Oct 28, 2020 at 6:22PM

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Shares of the cloud intelligence platform slipped in spite of a strong earnings report.

What happened

Shares of Dynatrace (DT -0.36%) finished the day lower even though the software-as-a-service (SaaS) stock posted a better-than-expected earnings report for the second quarter. But investors may have been disappointed that guidance didn't seem to reflect that momentum. The broader sell-off in the market on concerns about rising coronavirus cases in the U.S. and Europe also weighed on the stock.

The stock finished the day down 11.5%, while the S&P 500 lost 3.5% and the S&P 500 gave up 3.7%.

A digital image of a cloud

Image source: Getty Images.

So what

By any reasonable yardstick, it was a solid quarter for Dynatrace, which provides application management software that provides real-time notifications to companies as problems arise in their software stack or with their multicloud infrastructure.

Revenue in the quarter rose 30% to $168.6 million, which easily beat estimates of $160.7 million. Subscription revenue rose 36% to $157.7 million, and annual recurring revenue was up 35% to $638.1 million. Margins also improved further down the income statement as adjusted operating income jumped 79% from $29.8 million to $53.3 million and adjusted operating margin expanded from 23% to 32%. On the bottom line, adjusted earnings per share surged from $0.07 to $0.18, well ahead of expectations at $0.10.

CEO John Van Siclen said, "Dynatrace delivered strong second quarter results, exceeding our guidance on all key metrics. As digital transformation continues to accelerate, so does the scale and complexity of the dynamic multiclouds supporting these initiatives."

Now what

Given the strong numbers, the sell-off was puzzling. The stock started the session down modestly, and fell over the course of the day as Germany said it would close bars and restaurants to prevent the spread of the virus. 

Dynatrace called for a substantial slowdown in growth in the current quarter, which may be one reason for the sell-off, but its forecast of 19% to 21% growth to $171 million to $173 million was still ahead of estimates at $164.9 million. It also indicated slowing revenue growth in the fiscal fourth quarter.

Still, this was a demonstrably strong quarter, and as a provider of a necessary cloud service, the company is unlikely to lose business even if the pandemic gets worse. Given that position and a history of steady growth and profitability, investors may want to take advantage of the sell-off.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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