Activist hedge fund Starboard Value has taken a sizeable stake in software observability group Dynatrace and is pressing management to unlock greater shareholder value through higher margins and more aggressive capital returns, according to a report by Reuters.
In a letter to Dynatrace’s board and executive team, Starboard said it has made what it describes as a “substantial investment” in the company, arguing the stock is mis-priced and materially undervalued relative to peers. The fund is urging the business to improve operating efficiency, expand profitability, and significantly increase share repurchases.
Dynatrace shares rose more than 2% in afternoon trading following the disclosure.
The investment comes during a difficult period for the stock, which has fallen roughly 18% year-to-date. The wider software sector has also faced pressure as investors reassess valuations amid concerns that advances in artificial intelligence could disrupt traditional revenue models and automate parts of the software value chain.
Starboard pushed back on that narrative, arguing that Dynatrace has been unfairly grouped with companies most exposed to AI-driven disruption. Instead, it said increasing AI adoption across enterprises is likely to benefit the company by increasing the complexity of cloud infrastructure, applications, and AI workloads that its platform monitors.
According to the hedge fund, Dynatrace has already underperformed both industry peers and the broader market over a multi-year period, while currently trading at roughly half the valuation multiples of comparable infrastructure software and cybersecurity companies despite similar revenue growth profiles.
Starboard believes there is meaningful upside in profitability, estimating that adjusted operating margins could expand by at least 500 basis points by fiscal 2029. It argues this could be achieved through improved sales productivity, tighter cost controls, and better operating leverage.
The investor also suggested that Dynatrace could reduce annual sales and marketing expenses by around $75m without impacting growth.
On capital allocation, Starboard urged the company to move quickly on its existing $1 billion share buyback authorisation and suggested that total repurchases could exceed $2.5bn over the next three years, representing roughly a quarter of the company’s current market value of about $10.6bn.
Dynatrace confirmed receipt of the letter, noting that it has recently held introductory discussions with Starboard and expects to continue engaging with the activist investor going forward.
