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 lifting Wall Street’s major stock indexes to new heights, the excitement surrounding select stock splits in 2024 has been key, as well.
A stock split is a tool publicly traded companies have at their disposal that allows them to superficially adjust their share price and outstanding share count by the same magnitude. These adjustments are cosmetic in the sense that they don’t affect a company’s market cap or in any way impact its operating performance.
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Although there are two types of stock splits — forward and reverse — investors overwhelmingly favor one more than the other. Reverse splits are designed to increase a company’s share price, often with the goal of ensuring continued listing on a major stock exchange. Since this type of split is usually undertaken by struggling companies, most investors tend to avoid them.
On the other hand, forward stock splits are aimed at making a company’s shares more nominally affordable for everyday investors who might not have access to fractional-share purchasing through their broker. This type of split is almost always completed by businesses that have been consistently out-innovating and out-executing their competition, which is what’s made forward splits so popular within the investing community.
To add, companies enacting forward splits have been handily outperforming the benchmark S&P 500. Based on an analysis from Bank of America Global Research, companies conducting forward splits have averaged a 25.4% return in the 12 months following their split announcement since 1980, which is more than double the 11.9% average annual return for the S&P 500 over the same timeline.
Since Walmart kicked things off by announcing a 3-for-1 forward split in late January, more than a dozen high-profile companies have followed suit. This includes AI leader Nvidia, which completed its largest split on record (10-for-1) in June, and AI-networking specialist Broadcom, which enacted its first-ever split, also 10-for-1, in mid-July.
Given the overwhelming success companies conducting forward splits 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 stock.
Last week, this all-important question was answered.
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On Nov. 20, Wall Street’s preeminent cloud, network, and endpoint cybersecurity company, Palo Alto Networks(NASDAQ: PANW), lifted the hood on its fiscal first-quarter operating results, which covers business activity through Oct. 31. While there were plenty of highlights, perhaps none stood out more than the company’s board approving a 2-for-1 forward split, which is set to go into effect following the close of trading on Dec. 13.
Palo Alto’s coming split, which will reduce its share price from the upper $300s to the upper $100s, is its second since becoming a publicly traded company in July 2012. In a little over 12 years since its initial public offering (IPO), investors have watched this market-leading cybersecurity stock catapult higher by roughly 2,100%!
The beautiful thing about cybersecurity is that it’s evolved into a basic necessity service. Regardless of how well or poorly the U.S. or global economy are performing, businesses of all sizes with an online and/or cloud-based presence require protection to keep their data, and that of their customers, safe. Increasingly, this protection is falling to third-party providers like Palo Alto Networks.
One of the reasons Palo Alto has been able to sustain 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 over six years ago. A subscription-driven SaaS operating model offers a couple of key advantages for Palo Alto.
To begin with, cloud-based cybersecurity platforms that incorporate AI and machine learning tools are going to be more effective at recognizing and responding to potential threats than on-premises security solutions. Secondly, a subscription-based model should lead to better revenue retention and more predictable operating cash flow compared to a model focused on physical firewall products. Lastly, SaaS subscriptions generate juicier margins than physical firewall products.
When fiscal 2018 came to a close on July 31, 2018, 61.7% of the company’s net sales came from subscriptions and support. But during the fiscal first quarter of 2025, 83.5% of net sales were traced to this higher-margin segment.
On top of notably higher margins for SaaS subscriptions, compared to physical firewall products, Palo Alto has been landing bigger fish. It closed out the October-ended quarter with 305 customers yielding at least $1 million in annual recurring revenue (ARR), which represents a 13% increase from the prior-year period. Meanwhile, the company has 60 accounts producing at least $5 million in ARR, up 30% from the same period last year.
The final ingredient to Palo Alto’s success has been the willingness of its management team to make bolt-on acquisitions. A steady diet of buyouts has helped to expand Palo Alto Networks’ ecosystem of products and services, as well as promotes cross-selling opportunities with small-and-medium-sized businesses.
With an increasingly higher percentage of the company’s net sales coming from SaaS subscriptions, there’s a good chance we’ll see Palo Alto’s earnings growth outpace its sales growth. But even if this is the case, the company’s forward price-to-earnings ratio of 53 is aggressive and might leave limited upside for shares in the near-term.
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has 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.
