There's little question that Palo Alto Networks (PANW 0.11%) is one of the leading providers of cybersecurity solutions. The company offers an integrated three-pronged strategy that addresses the growing threat of cybersecurity: Strata, a network security platform that provides next-gen firewall solutions; Prisma, its cloud-based security services; and Cortex, its artificial-intelligence-powered endpoint security solution.
The company's robust business performance has given way to a soaring stock price. Palo Alto Networks shares have bucked the recent broader market downturn, climbing 55% over the past year, but that's just the beginning. The stock has gained an eye-catching 179%, 3,305%, and 801% during the preceding three-year, five-year, and 10-year periods, respectively.
On Tuesday, Palo Alto Networks announced plans to split its shares for the first time in the company's history. This development is causing investors to take a fresh look at the cybersecurity innovator and its stock. Let's recap just what a stock split entails and whether Palo Alto Networks stock is a buy.
The details
On Tuesday, in conjunction with the financial report for its fiscal fourth quarter (ended July 31), Palo Alto Networks announced that its board of directors had approved a 3-for-1 stock split of its common shares in the form of a stock dividend -- meaning shareholders would be awarded additional shares of stock (not a dividend in the usual sense).
Each stockholder of record as of the close of business on Sept. 6 will receive, after the end of trading on Sept. 13, two additional shares for every share owned. Split-adjusted trading for the stock will begin on Sept. 14.
Palo Alto Networks investors won't have to take any other action in order to receive the additional shares. Historically, the details are handled by investment brokerages behind the scenes and the newly minted shares will simply appear in shareholders' accounts.
It's worth noting that these additional shares may not appear immediately after the market close on Sept. 13. The timing for the appearance of the stock can vary from brokerage to brokerage and it can take as long as several days for the new shares to appear in investing accounts.
Adding some numbers to the equation could help give context to the process. For each share of Palo Alto Networks stock a shareholder owns -- trading for roughly $570 per share, as of this writing -- post-split, investors will have three shares valued at $190 each.
Do investors benefit from a stock split?
From a mathematical standpoint, and as shown in the example provided above, the total value of the investment held by each investor doesn't change. One share of Palo Alto Networks stock currently fetching $570 will be worth the same amount as three post-split shares priced at $190 (3 x $190 = $570). Much like slicing a pizza, it doesn't matter if the pie is sliced into six slices or 12 slices, the amount of pie available to eat is still the same. Similarly, Palo Alto Networks investors will simply have a greater number of lower-priced shares.
There is, however, an element of investor psychology at play, which will at times increase demand for the stock -- at least over the short term. For example, some prospective shareholders may have been unwilling or unable to shell out nearly $600 per share for the stock, but may be much more willing to buy shares at less than $200 per share. While the appeal of the initial stock price surge can be enticing, history suggests that the bump can be short-lived, ultimately giving way to the company's performance.
That said, a quick look at Palo Alto Networks' recent results suggests a stock on the move, with robust business and financial prospects, suggesting that investors might want to give the company another look.
Is Palo Alto Networks stock a buy?
Investors shouldn't buy Palo Alto Networks stock simply because the company has announced a stock split, but there are other reasons to consider an investment in the cybersecurity specialist. A look at the company's most recent financial results presents a pretty compelling argument.
For fiscal 2022 (ended July 31), Palo Alto Networks generated revenue of $4.26 billion, up 29% year over year -- even in the face of the prevailing macroeconomic headwinds. At the same time, the company reduced its net loss by 46%. Management also revealed that the company was profitable under generally accepted accounting principles (GAAP) for the first time in the fourth quarter, and it expects that profitability to continue through the coming year, putting to rest concerns about the bottom line.
Helping drive those results are strong customer metrics. Palo Alto Networks now serves 50% of the Global 2,000 customers, up from 35% in the year-ago quarter, and clients spending more than $1 million annually grew to more than 1,240, up 26%.
Finally, while some might view its valuation skeptically, at just seven times next year's expected sales, Palo Alto Networks sells at a discount to its high-flying peers in the cybersecurity industry.
Given its ongoing impressive performance, robust guidance, and reasonable valuation, Palo Alto Networks has all the makings of a long-term winner. With all of this in mind, investors would be wise to add some shares to their portfolio.
