The Nasdaq Composite(NASDAQINDEX: ^IXIC) has been on a roll for more than two years now, with gains fueled by improving economic conditions, the rise of artificial intelligence (AI), uncontested US elections and recent interest rate cuts by the Federal Reserve Bank. After rising 43% in 2023, the tech-focused index is up about 31% in 2024 (at time of writing).
Still, market history researchers will note that the rally likely offers even more upside potential. Back to 1972 – the first full year of Nasdaq trading – in any year next With gains of 30% or more, the tech-focused index has risen an average of 19%, suggesting the Nasdaq will continue to gain ground in 2025.
Furthermore, the recent resurgence in stock splits has investors taking a fresh look at companies that have split their shares, as this is normally preceded by years of robust operational and financial growth, fueling a surge in share prices. Let’s take a look at two companies that should be on investors’ shortlist.
Image source: Getty Images.
One long-term winner investors should consider is Palo Alto Networks(NASDAQ: PANW). The stock has returned 32% year to date and 884% over the past decade (at time of writing), prompting the company to initiate a 2-for-1 stock split expected to close this week will be completed. Despite the stock’s successful performance in recent years, the company is benefiting from long-term tailwinds that show no signs of slowing down.
The headlines are full of details about the devastating impact of data breaches, hacks and break-ins, and the situation is only going to get worse from here. Palo Alto Networks has a long track record of cybersecurity innovation, and the company recently took a bold step to help customers strengthen their defenses against unauthorized access.
Using multiple security vendors can leave holes in a system that hackers can exploit. That’s why Palo Alto has simplified its security architecture and consolidated its individual solutions into platforms with an emphasis on artificial intelligence (AI). It also took the bold step of offering free services to fill the void for customers who switched to any of the three platforms.
This was a risky strategy, but it seems to be paying off as Palo Alto has closed bigger deals and expanded relationships with its existing customers. Additionally, customers have a “significant incentive” to eventually adopt all three of the company’s security platforms: cloud security, security operations and network security.
For the first quarter of 2025 (ended October 31), Palo Alto Networks generated revenue that grew 14% year over year to $2.1 billion, while earnings per share (EPS) rose 77% to $0.99. Additionally, annual recurring revenue (ARR) from next generation security services (NGS) grew 40% to $4.5 billion. This illustrates that management’s strategy is paying off.
Palo Alto Networks isn’t cheap when you consider the most common valuation metrics, which often fall short when assessing a fast-growing company. However, if we use the price-to-earnings-growth ratio (PEG), which takes into account accelerating growth, it comes to 0.15, while any number less than 1 is the standard for an undervalued stock.
That’s why Palo Alto Networks is a buy.
Another long-term winner that investors should keep on their shortlist is Broadcom(NASDAQ:AVGO). The stock is up 54% so far in 2024 and 1,580% in the past 10 years (at the time of writing). This encouraged the company to declare a 10-for-1 stock split, which it completed in July. Despite the big wins, the arrival of generative AI early last year acted as a springboard for Broadcom, and there could be much more in store.
While the company is best known for its semiconductors, Broadcom provides a wide range of complementary products across the tech landscape that are essential for directing traffic over the air and into data centers, where most AI processing takes place. Management notes that “99% of all Internet traffic flows through some form of Broadcom technology,” illustrating the company’s reach within the AI ecosystem.
Complementing this opportunity, Broadcom is in the midst of processing its VMware acquisition, which has weighed on results. That process is almost complete and things are moving in the right direction. Broadcom is working to transition VMware from a perpetual license to a subscription business, and that strategy is paying off. Revenue from the company’s infrastructure software segment – which also includes VMware – is up 200% year over year.
For its fiscal third quarter (ended August 4), Broadcom generated revenue that rose 47% year over year to $13.1 billion, while adjusted earnings per share rose 18% to $1.24. Management expects the current trend to continue, raising full-year revenue guidance to $51.5 billion, a growth of approximately 44%.
Broadcom’s extensive reach in supporting the Internet, accelerated adoption of AI, and VMware’s upselling potential show that the future is bright. But despite the enormous potential, the stock is attractively priced: just 28 times forward earnings.
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*Stock Advisor returns December 9, 2024
Danny Vena has no positions in any of the stocks mentioned. The Motley Fool recommends Broadcom and Palo Alto Networks. The Motley Fool has a disclosure policy.
History says that the Nasdaq will boom in 2025. 2 Stock Splits to Buy Before That Happens was originally published by The Motley Fool
