When a high-quality company creates a significant amount of value, its stock price can soar into the hundreds, or even thousands, of dollars. That makes the stock a little expensive for retail investors, which leaves the majority of shares in the hands of institutions and large investment funds.
A stock split can resolve that situation. It increases the number of shares in circulation, which organically reduces the price per share by a proportional amount. For example, a 10-for-1 stock split will increase the share count by 10 times, which reduces the price per share by 90% (down to one-tenth of what it was before the split).
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Splits are entirely cosmetic, and they don’t change the intrinsic value of the underlying company, but they can make its stock more affordable for retail investors.
Palo Alto Networks(NASDAQ: PANW) is the world’s largest cybersecurity company. It completed a 3-for-1 split in September 2022, which reduced its stock price to $180 (from $540 before the split). However, the stock has surged 112% since then to trade at $383 as of this writing.
As a result, management just announced a new 2-for-1 split. If you own Palo Alto stock on Dec. 12 (the record date), your shares held will double when the split comes into effect on Dec. 16, and the price per share will be cut in half.
I think Palo Alto is on the cusp of a multi-year boom, which could drive significant value for investors from here. The company is investing heavily to build new cybersecurity products powered by artificial intelligence (AI), some of which already lead the industry. Here’s why Palo Alto stock might be a great buy as we head into 2025.
Palo Alto offers three cybersecurity platforms covering cloud security, security operations, and network security. Each one features dozens of individual products, and the company is weaving AI into as many of them as possible to automate everything from threat detection to incident response.
Palo Alto says too many organizations rely on human-led processes in their security operations centers, which are being overloaded by modern-day threats, leaving many incidents entirely uninvestigated. The company’s Cortex XSIAM security operations platform uses over 400 AI algorithms to help organizations automate those processes, so they can reduce the time it takes to mitigate threats.
One healthcare company adopted XSIAM and now resolves 90% of incidents with automation, up from just 10% previously. Another company reduced its mean time to remediate (MTTR) incidents to just 16 minutes, from an MMTR of three days prior to using XSIAM.
Palo Alto is also building a new portfolio of products called Secure AI by Design, which protects organizations that are using AI. The goal is to secure these companies’ data when they deploy it into third-party models (like those from OpenAI or Anthropic) to build AI software applications because that’s when it becomes highly exposed and vulnerable to leaks.
Palo Alto has secured over 750 AI applications so far, which leads the industry. Secure AI by Design could become a significant growth driver for the company in the future as AI adoption spreads.
Image source: Getty Images.
Palo Alto generated $2.1 billion in revenue during the fiscal 2025 first quarter (ended Oct. 31). That represented 14% growth compared to the year-ago period, which was an acceleration from 12% growth in the previous quarter three months earlier. Palo Alto is starting to reap the rewards from two key strategies: Investing in AI, and focusing on “platformization.”
The cybersecurity industry has a history of fragmentation. Providers often specialized in specific products, which left businesses piecing their security stack together from multiple vendors. Palo Alto now offers a holistic platform solution, so it can aim to be the one-stop shop for every organization’s cybersecurity needs.
When Palo Alto started focusing on platformization a year ago, it told investors this would lead to a temporary slowdown in its revenue growth. That’s because the company offered customers fee-free periods to help them transition away from their existing providers, so they could move more of their stack over to Palo Alto. Based on the revenue growth acceleration in Q1, that strategy is starting to pay off.
Palo Alto says a customer that adopts all three of its platforms has a lifetime value that is 40 times higher than a customer that uses just one, so platformization should be a significant long-term tailwind for the company’s growth.
Beneath the surface of its top-line result, Palo Alto saw a whopping 40% year-over-year increase in its annual recurring revenue (ARR) from next-generation security (NGS) products, which came in at a record $4.5 billion. NGS revenue includes AI products, and a little more than half of it comes from platform customers.
Palo Alto stock is trading near a record high, but it’s still much cheaper than its main competitor, CrowdStrike(NASDAQ: CRWD), as measured by one widely used valuation metric. Palo Alto’s price-to-sales (P/S) ratio is currently 16.4, which is a 37% discount to CrowdStrike’s P/S ratio of 26.3.
With that said, CrowdStrike consistently grows its total quarterly revenue by 30% or more, so it deserves a premium valuation to some degree. But Palo Alto is a much larger provider — its $4.5 billion in NGS ARR alone is higher than CrowdStrike’s total ARR of $3.8 billion.
Palo Alto has a very clear goal for the years ahead. It currently has 1,100 platformization customers, but it wants to triple that to as many as 3,500 by fiscal 2030. That will help the company grow its NGS ARR to $15 billion.
If we assume the company will be successful in meeting that goal, that places its stock at a forward P/S ratio of just 8.3 based on that $15 billion in fiscal 2030 revenue. That means its stock will have to nearly double over the next five or six years just to trade in line with its current P/S ratio of 16.4.
That’s a solid rate of return for investors. But it doesn’t even factor in the potential future demand from the fast-moving AI revolution, because the corporate sector’s cybersecurity needs are going to evolve as more businesses adopt AI. There could be several new opportunities for Palo Alto in the coming years that aren’t even baked into the company’s forecasts yet.
Therefore, investors looking for a new stock to add to their portfolio ahead of 2025 should definitely consider Palo Alto. Following the upcoming stock split on Dec. 16, buying one full share will be more affordable than it has been in around two years.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
