There is absolutely no doubt that the bulls rule Wall Street. Recently, the mature stock-driven Dow Jones Industrial Averagebenchmark S&P500and driven by growth stocks Nasdaq Composite reached the psychologically important plateaus of 45,000, 6,000 and 20,000 respectively.
While a number of factors are responsible for driving the broader market to new heights, including the artificial intelligence (AI) revolution, better-than-expected corporate profits and Donald Trump’s victory in November, it is important to understand the role that the excitement surrounding stock markets cannot be overlooked. splits have helped turn the tide.
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A stock split is a tool that publicly traded companies can rely on to superficially adjust their stock price and the number of shares outstanding by the same magnitude. Because the share price and number of shares are changed by proportionate factors, there is no change in the market capitalization, nor is there any impact on the underlying operating performance of the company.
Although splits come in two varieties – forward and backward – the investing community is much more attracted to one than the other.
The less popular of the two is the reverse stock split, which aims to increase a company’s stock price. Normally, reverse splits are undertaken by struggling companies trying to meet the minimum continuing share price standards of a major stock exchange. While not all reverse splits are necessarily bad news, the companies that do these types of splits require a lot of extra scrutiny and historically don’t have the best track record.
On the other hand, investors tend to love companies that complete a forward stock split. A forward split is intended to reduce a company’s stock price so that it becomes nominally more affordable for ordinary investors and/or employees participating in stock purchase plans. Not all brokers allow their clients to purchase fractional shares, and that’s where forward splits can come in handy.
Companies that implement forward splits have a rich history of outperforming their peers and leading in innovation. To boot, an analysis of Bank of America Global Research found that companies that have forward splits since 1980 have returned an average of 25.4% in the twelve months following the announcement of their split. By comparison, the S&P 500 has averaged a more modest average annual return of 11.9% over the same timelines.
In 2024, more than a dozen leading companies completed stock splits, including AI giants Nvidia, BroadcomAnd Super microcomputerall of which performed 10-to-1 forward splits.
Today, December 16, marks what should be the final stock split of a seemingly unstoppable company in 2024.
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On November 20, a leader in AI-driven cybersecurity Palo Alto Networks(NASDAQ: PANW) unveiled its fiscal first quarter 2025 operating results and added a surprising twist. The company’s board announced a 2-for-1 split, which is expected to be completed after the close of trading on December 13. The shares will trade at the adjusted price today, December 16. This is Palo Alto’s second stock split since going public, with the other, a 3-for-1 forward split, taking place in September 2022.
Since going public in July 2012, shares of Palo Alto Networks have skyrocketed 2,150% as of the closing bell on December 11. This outperformance is a reflection of the company performing better, innovating better and outsmarting the competition.
Before we get into the details, it’s important to recognize that Palo Alto is ideally positioned to benefit from cybersecurity becoming a basic need service.
With more companies than ever moving their data (and that of their customers) online and into the cloud, the responsibility for protecting this information increasingly falls to third parties. Criminals don’t just take a vacation because Wall Street has had a bad day or because the US/global economy has hit a speed bump. The need to protect sensitive data is constant, leading to predictable operating cash flow.
However, nothing has led to more consistent cash flow for Palo Alto Networks than the decisive shift the management team made more than six years ago to focus on software-as-a-service (SaaS) subscriptions. Although the company has not abandoned physical firewall products, over time they have become a smaller and smaller percentage of net sales.
The company’s next-generation AI-inspired security platforms are significantly more agile than on-premise security solutions, meaning they are more adept at detecting and responding to potential threats.
More importantly, a subscription model leads to higher margins than physical firewalls, and existing customers are more likely to remain loyal to the brand. This contributes to the consistency and predictability of the company’s operating cash flow.
The reason predictability is so important to Palo Alto Networks is because it regularly leans on its cash flow as a means to make additional acquisitions. A steady stream of acquisitions since its initial public offering (IPO) in 2012 has helped the company expand its product portfolio and increase cross-selling opportunities.
The icing on the cake for Palo Alto is its ability to attract larger customers. At the end of October, 305 customers generated at least $1 million in annual recurring revenue (ARR), up 13% from the prior year period. Approximately 20% of these customers (60) bring in more than $5 million in ARR, up 30% from the comparable quarter last year. Larger fish usually yield better margins.
In other words, if Palo Alto Networks sticks to its strategy and continues to execute on it, we could be talking about the need for another stock split within five years, if not less.
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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 and Nvidia. The Motley Fool recommends Broadcom and Palo Alto Networks. The Motley Fool has a disclosure policy.
Wall Street’s Last Unstoppable Stock Split of 2024 Has Arrived, Originally Published by The Motley Fool
