What's the idea?
The IT infrastructure observability market is expected to grow at 11.7% per year. Dynatrace offers leading solutions in this area. Although Dynatrace and Datadog compete for leadership in the field of IT observability, Dynatrace with its modest relative valuation represents greater value to investors than its main competitor.
The company demonstrates high customer retention rates, reflecting strong demand from current users. The strengthening of the sales team and a new market entry strategy allowed the company to focus on larger deals and expansion opportunities within the current customer base, as well as on active partnerships with system integrators and leading cloud providers.
Purchasing a combination of stocks and options gives the investor the opportunity to significantly increase potential returns with minimal potential risk growth. We recommend buying CALL options on DT shares with a strike price of $52.5 and an expiration date of 17/01/2025. The cost of the option will be approximately $3.10, while the purchase of one contract will cost $310.0 as option deals are for 100 shares.
About Company
Dynatrace (DT) offers an IT infrastructure monitoring platform that allows clients to optimize and control its performance. The company uses advanced artificial intelligence (AI) technologies to enhance business analytics quality and create cybersecurity solutions. Dynatrace solutions contribute to the digital transformation of corporations and have integration with more than 500 different technologies from other vendors, necessary for creating a complex environment. The company's products allow for significantly increasing IT systems efficiency in addition to basic monitoring simplification. Dynatrace was founded in 2005 in Linz, Austria. The company's shares have been traded on the NYSE since August 1, 2019.
Why do we like CALL OPTION DT.US @52.5?
Dynatrace is a recognized leader in the IT-observability market, which combines IT system monitoring solutions with advanced analytics and AI-based forecasting tools. Ultimately, the company's products allow upgrading and automating the operation of cloud systems, speeding up and providing a safer software delivery, and significantly improving the digital experience of users.
The IT-observability market is characterized by attractive growth rates: according to MarketsandMarkets forecasts, it will grow by 11.7% per year and will reach a volume of $4.1 billion by 2028, compared with $2.4 billion in 2023. The key drivers of long-term growth will be the development of AI and machine learning, as well as data analytics. From a sales perspective, market growth potential is ensured by the expansion of existing customer ecosystems and the penetration of technologies into new industries.
In this promising market niche, two players compete for leadership: Dynatrace and Datadog, each of which has strong strategies and product advantages. At the same time, a significantly more attractive relative valuation of Dynatrace shares makes them a more profitable investment for investors who want to gain access to this rapidly growing market. Dynatrace has a reliable financial base with a 20 percent free cash flow (FCF) conversion and stable profitability.
Dynatrace primarily focuses on large clients and enjoys high user loyalty, maintaining a retention rate of 112%. This indicates that the company has the potential to expand within its existing customer base, which it plans to implement through an enhanced go-to-market strategy. This strategy involves increased attention to strategic clients and closer cooperation with major cloud providers and system integrators. In addition, Dynatrace has introduced a new pricing model, Dynatrace Pricing Scheme (DPS), which is expected to contribute to the growth of cross-sales of products. About 20% of the company's customers have accepted the terms of contracts under the new model. These contracts are already generating about 40% of Dynatrace's annual recurring revenue (ARR), and their consumption volume is growing faster than the average ARR growth, the company said.
n the current conditions, buying long-term CALL options on DT shares might be a sensible step.
We recommend buying options with the following parameters:
- Option type: CALL
- Strike: $52.5
- Expiration date: 17/01/2025
- Option cost: $3.1
- Target price: $6.0
- Potential profitability: +94%
- Break-even point: $55.60
- From the current stock price to the break-even point: +9.7%
- Maximum possible loss: $310
Why are options investments sometimes more effective than investing in shares? To start trading options, there is no need to have a large capital. For example, at the current price of $50.70 per share, 100 DT shares would cost over $5070, while purchasing an option contract will only cost $310.
Moreover, options provide significant financial leverage, that is, if the stock price skyrockets, the option position will yield a significantly larger income than a similar position in shares. For instance, an increase in DT shares by 14% by the expiration date of 17/01/2025 will lead to a 68% increase in option value.
The table below shows the results of various investment strategies using DT shares and options at the expiration date, depending on the dynamics of the shares' value.
Proportion of shares and options in the portfolio, based on the volume of invested funds
To avoid taking on overly high risks, you can use a strategy of simultaneous purchase of stocks and options in a certain proportion. As can be seen from the table, this investment strategy allows for a higher return than when buying only stocks, but with less risk than when buying only options.
How to properly use the idea
We recommend buying long-term CALL options on DT stocks with a strike price of $38.0 and an expiry date of 01/17/2025. The option will cost approximately $3.10, with the purchase of one contract costing about $310, as option trades are concluded for 100 shares.
The investor will profit if on the expiration day, the price of the underlying asset is above the break-even point** of $55.60. The higher the DT stock price rises above this mark, the greater the profit will be. We recommend closing the position when the option price reaches $6.0. In this case, the profit will be 94%.
An option loss will occur if the price of DT shares on the expiration day drops below the break-even point. In this scenario, the maximum possible loss - 100% of the contract value - the investor will incur if the stock price is below the strike price, in our case $310.0.
The chart below shows the distribution of profits and losses from the option position depending on the price of DT shares on the expiration date.
If the growth of stocks is accompanied by increased volatility, then options will show significant growth over a shorter period of time, before the expiration date.
Important!
Options should be purchased using a limit order. Buying a contract by market order can lead to extremely disadvantageous prices.
This idea is speculative in nature and is associated with increased risks. Investing in options can lead to an increase in the value of the asset by 50%, 100%, 200%, and in some cases higher, as well as to a complete loss of its value and, accordingly, to losses at the level of 100%! In cases where volatility is low, profits or losses fluctuate within 20%-30%.
A reasonable approach to implementing option ideas is to invest a minor part of the portfolio in many such cases. In this way, losses from unsuccessful ideas will be offset by the high profitability of successful investments.
Options are an extremely volatile instrument, so they require more attention to not miss favorable entry and exit points from the position.
Key risks
There is a possibility that negative corporate events will lead to a decrease in the value of DT shares. In this case, CALL options will depreciate. An excessively low level of DT stock volatility may lead to the depreciation of options by the expiration date.