In October, Wall Street celebrated the two-year anniversary of the current bull market. While the rise of artificial intelligence (AI) has played an undeniably important role in pushing Wall Street’s major stock indexes to new heights, the excitement surrounding select 2024 stock splits has also been crucial.
A stock split is a tool that listed companies have at their disposal that allows them to superficially adjust their share price and the number of shares outstanding in equal measure. These adjustments are cosmetic in the sense that they do not affect a company’s market capitalization or in any way its operating performance.
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Although there are two types of stock splits – forward and reverse – investors overwhelmingly prefer one more than the other. Reverse splits are intended to increase a company’s share price, often with the aim of ensuring continued listing on a major stock exchange. Because these types of splits are usually done by struggling companies, most investors tend to avoid them.
On the other hand, forward stock splits aim to make a company’s shares more nominally affordable to ordinary investors who may not have access to purchasing fractional shares through their broker. These types of splits are almost always executed by companies that consistently overinnovate and outmaneuver the competition, which is what makes forward splits so popular within the investing community.
Furthermore, companies that implement forward splits have outperformed the benchmark by a wide margin S&P500. Based on an analysis of Bank of America Global Research, companies that execute forward splits have returned an average of 25.4% in the twelve months following the split announcement since 1980, which is more than double the average annual return of 11.9% for the S&P 500 over the same timeline.
Since Walmart When things got going by announcing a 3-for-1 forward split in late January, more than a dozen high-profile companies followed suit. This also applies to AI leader Nvidiawhich completed its largest ever split (10 to 1) in June, and a specialist in AI networks Broadcomwhich implemented its first-ever split in mid-July, also 10-for-1.
Given the overwhelming success that forward split companies have demonstrated for more than four decades, investors are constantly on the lookout for which market-leading company will become Wall Street’s next stock split.
Last week this very important question was answered.
On November 20, Wall Street’s leading cybersecurity firm, Palo Alto Networks (NASDAQ: PANW)explained the cap on the operating results for the first quarter of the financial year, which covers business activities up to and including October 31. While there were many highlights, perhaps none more stood out than the company’s board approving a 2-for-1 forward split, meaning it will take effect after the close of trading on December 13.
Palo Alto’s upcoming split, which will lower its share price from the high $300s to the high $100s, is the second since it became a publicly traded company in July 2012. In just over a dozen years since its initial public offering (IPO), investors have watched this leading cybersecurity stock skyrocket by approximately 2,100%!
The great thing about cybersecurity is that it has developed into a basic need service. No matter how well or poorly the U.S. or global economy is performing, businesses of all sizes with an online and/or cloud-based presence need protection to keep their data and that of their customers safe. This protection increasingly ends up with third-party providers such as Palo Alto Networks.
One of the reasons Palo Alto has maintained a double-digit growth rate is because the company shifted its focus from physical firewall products to cloud-based software-as-a-service (SaaS) solutions more than six years ago. A subscription-based SaaS business model offers a number of important benefits to Palo Alto.
For starters, cloud-based cybersecurity platforms that integrate AI and machine learning tools will be more effective at recognizing and responding to potential threats than on-premise security solutions. Second, a subscription-based model should lead to better revenue retention and more predictable operating cash flow compared to a model that focuses on physical firewall products. Finally, SaaS subscriptions generate sharper margins than physical firewall products.
As fiscal 2018 ended on July 31, 2018, 61.7% of the company’s net revenue came from subscriptions and support. But during fiscal first quarter 2025, 83.5% of net sales were driven by this higher-margin segment.
In addition to significantly higher margins for SaaS subscriptions, compared to physical firewall products, Palo Alto has also landed bigger fish. It ended the quarter ending in October with 305 customers bringing in at least $1 million in annual recurring revenue (ARR), representing a 13% increase over the prior-year period. Meanwhile, the company has 60 accounts generating at least $5 million in ARR, up 30% from the same period last year.
The final ingredient for Palo Alto’s success is the management team’s willingness to make additional acquisitions. A steady diet of buyouts has helped expand Palo Alto Networks’ ecosystem of products and services and foster cross-selling opportunities with small and mid-sized businesses.
With an increasing percentage of the company’s net revenue coming from SaaS subscriptions, Palo Alto’s earnings growth is likely to outpace revenue growth. But even if this is the case, the forward price-to-earnings ratio of 53 is aggressive and may leave limited upside potential for the stock in the near term.
Before you buy shares in Palo Alto Networks, consider the following:
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions at Bank of America. The Motley Fool holds positions in and recommends Bank of America, Nvidia, and Walmart. The Motley Fool recommends Broadcom and Palo Alto Networks. The Motley Fool has a disclosure policy.
Meet Wall Street’s Latest Stocks – A Leading Company Soaring 2,100% Since IPO Originally published by The Motley Fool
