Wall Street’s Stock Split Excitement: The Rise of Palo Alto Networks

In October, Wall Street marked the two-year milestone of the current bull market. A significant factor behind the surge in major stock indexes has been the rise of artificial intelligence (AI). Additionally, excitement surrounding upcoming stock splits in 2024 has contributed to this upward trend.

A stock split is a mechanism that allows publicly traded companies to alter their share price and total number of outstanding shares equally. While it may seem impactful, these changes are superficial and do not influence the company’s market capitalization or operational efficiency.

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2024: A Year for Forward Splits

There are two primary types of stock splits: forward and reverse. However, investors show a clear preference for forward splits over reverse splits. Typically, reverse splits occur when a company seeks to increase its share price, often necessary for maintaining listings on major stock exchanges. Such companies are often struggling, leading most investors to steer clear.

In contrast, forward splits make shares more affordable and are frequently executed by successful companies. These splits attract the investing community because they often signal robust performance and innovation.

Historically, companies that enact forward splits have outperformed the benchmark S&P 500. According to research from Bank of America Global Research, these companies have averaged a 25.4% return in the year following their split announcement since 1980. This is notably higher than the 11.9% annual return of the S&P 500 in the same period.

Walmart set the forward split trend in motion by announcing a 3-for-1 split in January. Following this announcement, several high-profile firms including AI frontrunner Nvidia executed a record 10-for-1 split in June, while Broadcom completed its first split, also a 10-for-1, in July.

Given the historical success of forward splits, investors are keenly watching for the next major split on Wall Street. Recently, more clarity emerged on this front.

Image source: Getty Images.

Palo Alto Networks: A Strong Market Player

On Nov. 20, Palo Alto Networks (NASDAQ: PANW), a leader in cloud, network, and endpoint cybersecurity, published its fiscal first-quarter results through Oct. 31. Among its highlights was the announcement of a 2-for-1 forward split, effective after the market closes on Dec. 13.

This upcoming split will adjust Palo Alto’s share price from the $300 range to the $100 range. This will mark the company’s second split since it went public in July 2012. Over just over a decade, the stock has increased an impressive 2,100% since its initial public offering (IPO).

Cybersecurity has grown into an essential service for businesses of all sizes, especially those with online operations. Amid various economic conditions, companies require protection to safeguard their data, which increasingly leads to contracts with firms like Palo Alto Networks.

One reason for Palo Alto’s continuous growth is its shift to cloud-based software-as-a-service (SaaS) solutions, as opposed to merely providing physical firewalls. This shift occurred over six years ago and provides significant advantages.

Cloud-based cybersecurity solutions that utilize AI and machine learning are often more effective against potential threats than traditional products. In addition, a SaaS model promotes better revenue retention and more predictable cash flow, along with higher profit margins.

As of July 31, 2018, 61.7% of Palo Alto’s net sales were derived from subscriptions. By the fiscal first quarter of 2025, this figure rose to 83.5%.

Furthermore, Palo Alto’s growth is bolstered by expanding its customer base. At the end of October, they had 305 clients generating at least $1 million in annual recurring revenue (ARR), a 13% increase from the previous year. Noteworthy too is the 30% increase in clients exceeding $5 million in ARR.

Palo Alto’s ongoing success also stems from its management’s strategy of acquiring complementary companies, enhancing its product offerings and cross-selling opportunities.

With an increasing proportion of revenue coming from higher-margin SaaS subscriptions, it’s likely that earnings growth will soon surpass sales growth. However, with a forward price-to-earnings ratio of 53, the shares may have limited short-term upside potential.

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Bank of America is an advertising partner of Motley Fool Money. Sean Williams holds 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.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.