After a couple of years of a bear market, cloud computing stocks are making a comeback in 2024. The rise of artificial intelligence (AI) has contributed to the increasing demand for tech stocks in the first two months of the year.
However, it is important to note that cloud software never really went away. Despite investor worry, global spending on cloud computing continued to rise over the past couple of years. In fact, according to research firm Gartner, end-user spending on cloud services is expected to reach $680 billion in 2024, up from an estimated $411 billion in 2021.
While generative AI has been in the spotlight for over a year, “traditional” cloud services are still experiencing growth. As new use cases emerge, the need to monitor and secure IT processes is growing as well. This is why chip design companies like Broadcom have completed a mega-merger with big cloud software management business VMware, and networking hardware giant Cisco Systems has submitted a bid to acquire Splunk to focus on cloud and network monitoring services.
This wave of cloud spending is particularly benefiting smaller software companies, especially those in the security and analytics field. One such company is Dynatrace (NYSE: DT), a cloud observability and application performance monitoring (APM) stock. Dynatrace sells its cloud observability and security software to some of the world’s largest organizations. Its main competitor, Datadog (NASDAQ: DDOG), offers cloud-based data analytics for smaller and midsize companies. Splunk, an older player in the field, only recently started pushing to modernize its software stack.
Dynatrace’s software, powered by its AI assistant “Davis,” specializes in observability and APM. It identifies bottlenecks, trouble spots, and security vulnerabilities in computing systems, and can recommend and automate fixes.
Dynatrace recently acquired an AI start-up called Runecast, which helps customers with the security and compliance of their hybrid cloud systems. This acquisition further strengthens Dynatrace’s position in the market.
In the era of AI, large organizations often need to keep their data and proprietary apps in their own data centers. This gives Dynatrace’s flexible software suite an advantage, as it excels in all IT environments, both cloud and non-cloud. The company’s revenue has been steadily growing at around 20% year-over-year, thanks to its large and complex customer base.
In the last quarter, Dynatrace generated net income of $42.7 million and free cash flow of $67.4 million. The company has consistently achieved profitable growth and has a strong balance sheet with no debt.
Despite its high premium valuation, with shares trading at nearly 80 times trailing-12-month earnings per share and about 45 times trailing-12-month free cash flow, Dynatrace is well-positioned to benefit from the growing demand for cloud observability and APM software. The company’s strong financials and continued execution of its growth strategy make it an attractive investment option.
However, due to its high volatility, it may be prudent to consider a dollar-cost averaging plan when investing in Dynatrace. This strategy mitigates the impact of market fluctuations and allows investors to benefit from the company’s long-term growth potential.
Overall, Dynatrace is an AI stock that has proven to be profitable and is well-positioned in the cloud observability and APM market. Its steady growth and financial strength make it a promising investment option for those looking to capitalize on the rise of cloud computing and AI.
Please note that this article on a specific company and investment strategy is based on the author’s opinion and should not be considered financial advice. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.
