There’s absolutely no question that the bulls are in charge on Wall Street. Recently, the mature stock-driven Dow Jones Industrial Average, benchmark S&P 500, and growth stock-propelled Nasdaq Composite reached the psychologically important plateaus of 45,000, 6,000, and 20,000, respectively.
While a number of factors are responsible for sending the broader market to new heights, including the artificial intelligence (AI) revolution, better-than-expected corporate earnings, and Donald Trump’s November victory, it’s important not to overlook the role that excitement surrounding stock splits has played in lifting the tide.
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A stock split is a tool publicly traded companies can lean on to superficially adjust their share price and outstanding share count by the same magnitude. Because share price and share count are altered by commensurate factors, there’s no change in market cap, nor is there any impact on the company’s underlying operating performance.
Although splits come in two varieties — forward and reverse — the investing community gravitates to one far more than the other.
The less-popular of the two is reverse stock splits, which aim to increase a company’s share price. Usually, reverse splits are implemented by struggling businesses that are attempting to meet the minimum continued share price listing standards of a major stock exchange. While not all reverse splits are necessarily bad news, the companies conducting this type of split require a lot of extra vetting and, historically, don’t have the best track records.
On the other hand, investors tend to love companies completing forward stock splits. A forward split is designed to reduce a company’s share price in order to make it more nominally affordable for everyday investors and/or employees participating in stock purchase plans. Not all brokerages allow their customers to purchase fractional shares, which is where forward splits can come in handy.
Companies enacting forward splits have a rich history of outperforming their peers and leading with innovation. To boot, an analysis from Bank of America Global Research found that companies conducting forward splits have averaged a 25.4% return in the 12 months after announcing their split, since 1980. By comparison, the S&P 500 has averaged a more modest 11.9% average annual return during these same timelines.
In 2024, more than a dozen prominent businesses completed stock splits, including AI giants Nvidia, Broadcom, and Super Micro Computer, which all executed 10-for-1 forward splits.
Today, Dec. 16, marks what should be last stock split from a seemingly unstoppable company in 2024.
Image source: Getty Images.
On Nov. 20, AI-driven cybersecurity leader Palo Alto Networks (NASDAQ: PANW) unveiled its fiscal first-quarter operating results for 2025 and added a surprising twist. The company’s board announced a 2-for-1 forward split, which is set to complete after the close of trading on Dec. 13. Shares are to begin trading at the adjusted price today, Dec. 16. This is Palo Alto’s second stock split since going public, with the other, a 3-for-1 forward split, occurring in September 2022.
Since going public in July 2012, shares of Palo Alto Networks have skyrocketed higher by 2,150%, as of the closing bell on Dec. 11. This outperformance is a reflection of the company out-executing, out-innovating, and outmaneuvering its competition.
Before digging into the specifics, it’s important to recognize that Palo Alto is ideally positioned to benefit from cybersecurity becoming a basic necessity service.
With more businesses than ever shifting their data (and that of their customers) online and into the cloud, the onus of protecting this information is increasingly falling onto third parties. Criminals don’t take a holiday just because Wall Street had a bad day or the U.S./global economy hit a speed bump. The need to protect sensitive data is constant, which leads to predictable operating cash flow.
However, nothing has led to more consistent cash flow for Palo Alto Networks than the decisive shift its management team made more than six years ago to focus on software-as-a-service (SaaS) subscriptions. Although the company hasn’t abandoned physical firewall products, they’ve become an increasingly smaller percentage of net sales over time.
The company’s AI-inspired next-generation security platforms are considerably nimbler than on-premises security solutions, which means they’re more adept at spotting and responding to potential threats.
More importantly, a subscription-driven model leads to higher margins than physical firewalls, and it’s more likely to keep existing customers loyal to the brand. This adds to the consistency and predictability of the company’s operating cash flow.
The reason predictability is so important for Palo Alto Networks is because it regularly leans on its cash flow as a means to make bolt-on acquisitions. A steady stream of acquisitions since its initial public offering (IPO) in 2012 has helped the company expand its product portfolio and increased cross-selling opportunities.
The icing on the cake for Palo Alto has been its ability to lure bigger customers. It ended October with 305 customers generating at least $1 million in annual recurring revenue (ARR), which was up 13% from the prior-year period. Roughly 20% of these customers (60) are bringing in north of $5 million in ARR, up 30% from the comparable quarter last year. Bigger fish tend to yield better margins.
In other words, if Palo Alto Networks sticks to its strategy and continues to execute, 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 in Bank of America. The Motley Fool has 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.
