The Nasdaq Composite(NASDAQINDEX: ^IXIC) has been on a roll for more than two years now, with its gains fueled by improving economic conditions, the dawn of artificial intelligence (AI), an uncontested U.S. election, and recent interest rate cuts by the Federal Reserve Bank. After rising 43% in 2023, the tech-focused index has gained roughly 31% in 2024 (as of this writing).
Yet students of market history will note that the rally likely has additional upside ahead. Going back to 1972 — the first full year in which the Nasdaq traded — in every year following gains of 30% or more, the tech-centric index has climbed 19%, on average, which suggests the Nasdaq will continue to gain ground in 2025.
Furthermore, the recent renaissance of forward stock splits has investors taking a fresh look at companies that have split their shares, as this is normally preceded by years of robust operating and financial growth, fueling a surge in its stock price. Let’s look at two companies that should be on investors’ short list.
Image source: Getty Images.
One long-term winner investors should consider is Palo Alto Networks(NASDAQ: PANW). The stock has delivered gains of 32% so far this year and 884% over the past decade (as of this writing), prompting the company to initiate a 2-for-1 forward stock split that’s scheduled to conclude this week. Despite the stock’s blockbuster performance in recent years, the company is benefiting from secular tailwinds that show no signs of slowing.
Headlines are rife with details of the devastating impact of data breaches, hacks, and intrusions, and the situation will only get worse from here. Palo Alto Networks has a long track record of innovation in cybersecurity, and the company recently took a bold step to help customers beef up their defenses against unauthorized access.
Using multiple security vendors can leave gaps in a system that hackers can exploit, so Palo Alto has been simplifying its security architecture and consolidating its individual solutions into platforms with a focus on artificial intelligence (AI). It also took the bold step of offering free services to fill the void for customers who switched to one of its three platforms.
This was a risky strategy, but it appears to be paying off, as Palo Alto has been signing larger deals and expanding relationships with its existing customers. Furthermore, customers have a “significant incentive” to eventually adopt all three of the company’s security platforms: cloud security, security operations, and network security.
For its fiscal 2025 first quarter (ended Oct. 31), Palo Alto Networks generated revenue that grew 14% year over year to $2.1 billion, while earnings per share (EPS) soared 77% to $0.99. Furthermore, annual recurring revenue (ARR) from its next-generation security (NGS) services grew 40% to $4.5 billion. This illustrates that management’s strategy is bearing fruit.
Palo Alto Networks isn’t cheap when viewed using the most common valuation metrics — which tend to fall short when evaluating a high-growth company. However, using the price/earnings-to-growth (PEG) ratio, which factors in its accelerating growth, it clocks in at 0.15, when 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 investors should keep on their short list is Broadcom(NASDAQ: AVGO). The stock is up 54% year to date in 2024 and up 1,580% over the past 10 years (as of this writing). This encouraged the company to declare a 10-for-1 stock split, which it completed in July. Despite its hefty gains, the advent of generative AI early last year has acted as a springboard for Broadcom, and there could be much more in store.
While the company is known primarily for its semiconductors, Broadcom supplies a wide range of ancillary products across the tech landscape that are essential for directing traffic through the ether and in data centers, which is where most AI processing takes place. Management notes that “99% of all internet traffic crosses through some type of Broadcom technology,” which helps to illustrate the company’s reach across the AI ecosystem.
Adding to that opportunity, Broadcom is in the midst of digesting its acquisition of VMware, which has weighed on its results. That process is nearly complete and things are looking up. Broadcom is working to convert VMware from a perpetual license to a subscription business, and that strategy is paying off. Revenue from the company’s infrastructure software segment — which includes VMware — is 200% year over year.
For its fiscal third quarter (ended Aug. 4), Broadcom generated revenue that jumped 47% year over year to $13.1 billion, while its adjusted EPS climbed 18% to $1.24. Management expects the current trend to continue, increasing its full-year revenue forecast to $51.5 billion, or growth of roughly 44%.
Broadcom’s extensive reach in underpinning the internet, the accelerating adoption of AI, and the upselling potential of VMware shows the future is bright. Yet despite the vast opportunity, the stock is attractively priced at just 28 times forward earnings.
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Danny Vena has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom and Palo Alto Networks. The Motley Fool has a disclosure policy.
