Palo Alto Networks Announces 2-for-1 Stock Split. Here's What Investors Need to Know.

There's no denying the ongoing threat of cybersecurity attacks. The global average cost of a data breach in 2024 thus far has been $4.88 million, according to a report by IBM, and that amount grows with each passing year. The stakes have never been higher and with the significant potential for business disruption, cybersecurity has become a critical consideration for any business -- and Palo Alto Networks (NASDAQ: PANW) is an undisputed leader in the field.

The company's consistent execution and business performance have fueled its impressive rise. Palo Alto stock has gained 111% over the past three years, driven by strong revenue and profit growth resulting from surging demand for cybersecurity solutions. But there's more. Since Palo Alto's initial public offering (IPO) in mid-2012, the stock has soared from a split-adjusted price of $14 to more than $383, representing impressive gains of 2,638%.

On Thursday, in conjunction with the release of the company's quarterly results, Palo Alto announced plans to split its shares for the first time since September 2022. The stock has more than doubled in the interim, which is likely the catalyst for this corporate action. This revelation is causing investors to take a fresh look at the stock. Let's review the specifics of a stock split and what it means for investors.

Image source: Getty Images.

The stock-split fine print

Palo Alto announced that its board of directors had approved a 2-for-1 forward stock split. This will result from an amendment to the company's Restated Certificate of Incorporation, which management says will create "a proportionate increase of the number of shares of authorized common stock."

As a result of this split, shareholders of record as of Dec. 12, 2024, will receive one additional share of stock for each share they own after the market close on Friday, Dec. 13. The stock is expected to begin trading on a split-adjusted basis on Dec. 16.

Palo Alto Networks shareholders don't need to take any other action in order to receive the additional shares of stock. Investment banks and brokerage firms handle all the specifics behind the scenes. The newly minted shares will just show up in investment accounts with no further action needed. The specific timing can vary from brokerage to brokerage, so investors needn't worry if the newly issued shares aren't there immediately on Dec. 16. It can take hours, or even days, for the additional shares to make an appearance.

For each share of Palo Alto stock a shareholder owns -- currently trading for roughly $386 per share (as of this writing) -- post-split, investors will hold two shares worth $193 each.

Does a stock split even matter?

As is clear from the above example, the total value of ownership doesn't change based on the stock split alone, it's merely a different way of viewing the whole. Put another way, if you have $1, it doesn't matter if you have a dollar bill or four quarters, you still have the same amount of money. By the same token, Palo Alto stockholders will simply have a greater number of lower-priced shares.

However, over the past few years, investor psychology has taken on greater importance, and excitement for the stock splits themselves has ignited greater interest. Companies also believe that a reduced stock price can boost demand for the lower-priced shares. While that's often the case -- at least over the short term -- the euphoria historically dies down, and investors begin to focus on what matters most: the company's operational and financial performance, which will ultimately be what drives the stock price higher or lower over the longer term.

Is Palo Alto stock a buy?

While the stock split alone isn't reason enough to buy Palo Alto, there are other reasons the cybersecurity specialist is a buy. The company's financial report provides plenty of evidence to support that argument.

In its fiscal 2025 first quarter (ended Oct. 31), Palo Alto reported revenue that climbed 14% year over year to $2.14 billion. This drove earnings per share (EPS) up 77% to $0.99. Both figures were enough to surpass Wall Street's expectations.

Perhaps more importantly, the results fueled a 40% increase in the company's next-generation security annual recurring revenue (ARR), which jumped to $4.5 billion. It's almost always a good sign when ARR is growing at a faster rate than revenue, as it suggests robust growth will continue into the future.

The need for cybersecurity solutions shows no signs of slowing. The global cybersecurity market was estimated at $238 billion in 2023 and is expected to soar to $878 billion by 2034, a compound annual growth rate of nearly 13%, according to Precedence Research.

If you have any doubts as to Palo Alto's pedigree, consider this. The company was rated as a leader in Gartner's 2024 Magic Quadrant for its software-defined network solutions. Palo Alto was also recognized as a leader in the Q4 2024 Forrester Wave Report for its enterprise firewall solutions.

Investors shouldn't buy Palo Alto Networks shares based solely on its impending stock split. Rather, the company's long track record of consistent execution, impressive share price gains, and robust performance make Palo Alto stock a winning investment.

There is the matter of Palo Alto's valuation, which could put some investors off. The recent stock price surge has led to a commensurate increase in its valuation. Palo Alto is currently selling for 60 times forward earnings and 12 times forward sales -- which is by no means cheap. However, Palo Alto stock has soared 368% over the past five years, 4 times the returns of the S&P 500, so you get what you pay for.

The company's robust business and financial growth make it a great candidate for dollar-cost averaging, which allows you to buy fewer shares when the cost is higher while picking up more shares when the stock price declines.

If you feel Palo Alto is too expensive right now, it certainly deserves a place on your watch list.

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Danny Vena has no position in any of the stocks mentioned. The Motley Fool recommends Gartner, International Business Machines, and Palo Alto Networks. The Motley Fool has a disclosure policy.