Market Overview
Following a monster week of earnings, a Federal Reserve interest rate hike, and the January Jobs report, “risk on” continues to be the theme in early 2023 as the Nasdaq once again led the indexes higher. By week’s end the S&P 500 had gained 1.64%, the Dow fell marginally, and the Nasdaq had rallied another 3.35%.
Speaking of earnings, this week we are adding a stock that exploded higher following a big beat last week.
The Stock – Dynatrace (DT)
Why the Strength
Corporations everywhere are using cloud environments these days, but that doesn’t mean they’re simple. Dynatrace sells software and services that assist enterprises in monitoring the status and operability of all the software and systems they have running in the cloud.
Called full-stack monitoring and analysis (FSMA), it’s a growth business: Sales in the December quarter were up 24% to $298 million, results that downplay the strength of the 40% of clients that are outside the U.S. given the strengthening dollar. (Currency-neutral revenues, as well as recurring revenue, were both up 29%.)
Already used by 3,300 companies, Dynatrace benefits from a need from enterprise-level outfits to automate their systems, as surveys show development and operations departments spend 30% of their time manually fixing errors and security vulnerabilities in the cloud, time companies would rather see spent innovating. The company’s sales strategy is to get any foothold into a business they can and expand the services they sell into it over time. Deployed in full, Dynatrace uses AI to test and monitor all of a firm’s systems and recommend how to optimally use tech resources to lower costs and hike efficiency while also providing constant security to increasingly frequent attempts from hackers. The typical customer spends upwards of $300,000 annually with Dynatrace, which should translate to full-year revenue close to $1.2 billion for fiscal 2023, which ends in March.
Expect the current quarter to produce sales of $305 million while management should also boost the gross margin. Dynatrace emphasizes its forecasts conservatively, a move that allowed fiscal Q3 results to beat expectations. The company hasn’t laid out revenue expectations for fiscal 2024, but Wall Street is expecting another round of 20%-plus revenue growth while earnings approach $1 per share and free cash flow comes in much larger than that.
Technical Analysis
DT got nailed from late 2021 into early May along with most every software stock, but then began a very nice bottoming effort—during the next eight months, not only did shares hold their May low but they gradually tightened up, especially after a solid earnings reaction in early November. Last week saw the quarterly report gap shares higher, and they encouragingly followed through nicely, too, reaching 10-month highs. Stop — 39
The Covered Call Trade
Buy Dynatrace (DT) Stock at 46, Sell to Open February 46 Strike Calls (exp. 2/17) for $1, or a Net Price of 45 or less
Static Return: $100 per covered call (2.22%)
Breakeven: 45
Covered Call Return (if assigned): $100 per covered call (2.22%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 45 or less. (In this case 46 minus 1 = 45. Or another example is you could pay 46.25 for the stock and sell the call for 1.25, which also equals 45)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on February 14, 2023.
