There’s no getting around it: cybersecurity threats are a constant reality in our world. IBM reports that the average cost of a data breach worldwide in 2024 has reached a staggering $4.88 million, and this figure seems to climb each year. With the potential for massive business disruptions, cybersecurity should be at the forefront of any company’s strategy, and Palo Alto Networks (NASDAQ: PANW) stands as a clear frontrunner in this arena.
This cybersecurity giant’s solid execution and robust business performance have propelled it to new heights. Over the past three years, Palo Alto’s stock has appreciated by 111%, thanks to surging demand for its cybersecurity services that have driven impressive revenue and profit growth. To add more context, ever since its IPO back in mid-2012, where shares were valued at a split-adjusted $14, they have now shot up to over $383. That’s a mind-blowing 2,638% increase!
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On the day of their recent quarterly results announcement, Palo Alto also revealed a big move: a plan to split their shares, something they haven’t done since September 2022. Given how much the stock has increased since then, it’s no wonder they’re taking this step. This news has got investors buzzing and taking a closer look at what this stock split means. So, let’s delve into the details of a stock split and what it signifies for those holding shares.
Palo Alto’s board of directors has given the green light for a 2-for-1 forward stock split. This will come about through an amendment to their Restated Certificate of Incorporation, aiming to create “a proportionate increase in the number of shares of authorized common stock.”
As part of this action, shareholders on record by December 12, 2024, will be granted an additional share for each one they hold, effective after the market closes on December 13. The stock is expected to start trading on this new split-adjusted basis from December 16 onwards.
For those holding Palo Alto Networks shares, don’t worry about doing anything to get these extra shares. Everything is handled seamlessly in the background by investment banks and brokerage firms. The newly issued shares will simply appear in investment accounts—however, the timing may differ slightly from one brokerage to another, so there’s no cause for alarm if they don’t show up right away on December 16. Sometimes it might take a bit longer for them to appear.
For each share you own of Palo Alto stock—trading around $386 a piece at the time of writing—you’ll end up with two shares valued at $193 each after the split. It’s crucial to note that the total value of your holdings doesn’t change because of the stock split itself. It merely presents your investment differently, kind of like exchanging a dollar bill for four quarters. Essentially, you’ll now own more shares, but each at a lower price.
However, stock splits can often spark enthusiasm among investors, and this shift in perception may temporarily boost demand for the newly lower-priced shares. But over time, as history shows, the initial excitement tends to fade, and the focus shifts back to what really matters: the company’s actual operational and financial performance, which is the real driver of stock prices in the long run.
Though a stock split isn’t, by itself, a sufficient reason to invest in Palo Alto Networks, the company has plenty of merits justifying its appeal. Their financial results tell a promising story. In the first quarter of fiscal 2025 (ending October 31), Palo Alto saw its revenue grow by 14% year-over-year, hitting $2.14 billion, which pushed earnings per share by 77% to $0.99, surpassing Wall Street’s predictions.
More importantly, this performance fueled a 40% jump in their next-generation security’s annual recurring revenue (ARR), reaching $4.5 billion. Such growth in ARR, outpacing overall revenue growth, indicates potential for continued future growth.
The demand for cybersecurity solutions shows no sign of waning. As of 2023, the global cybersecurity market was valued at $238 billion, with projections reaching $878 billion by 2034, according to Precedence Research, translating to a compound annual growth rate near 13%.
If there’s any doubt about Palo Alto’s standing in the industry, just look at their accolades. Recognized as a leader by Gartner in the 2024 Magic Quadrant for software-defined network solutions, and again in the Q4 2024 Forrester Wave Report for enterprise firewall solutions, it’s clear Palo Alto earns its star reputation.
Investors should avoid making purchase decisions based solely on the upcoming stock split. Instead, it’s the company’s solid history of execution, share price ascension, and formidable performance that make Palo Alto a sound investment.
One point worth considering is Palo Alto’s valuation, which could potentially dissuade some investors. Their recent share price surge has inflated its valuation, with the stock trading at 60 times forward earnings and 12 times forward sales. However, with a stock price climb of 368% over the last five years—quadrupling the returns of the S&P 500—you certainly get a bang for your buck.
Thanks to its strong business and financial growth, incorporating Palo Alto into a dollar-cost averaging strategy can be a wise move, allowing investors to buy fewer shares when prices rise and more when they dip.
If you’re hesitant about Palo Alto’s current price, it certainly warrants a spot on your watchlist.
However, before investing in Palo Alto Networks, keep this in mind:
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Danny Vena holds no positions in any stocks mentioned. The Motley Fool suggests investing in Gartner, International Business Machines, and Palo Alto Networks. They maintain a disclosure policy.
Originally published by The Motley Fool.
