Palo Alto Networks (PANW 0.11%) recently made headlines as the latest tech company to announce a stock split. With shares trading at over $550 apiece, it's not accessible enough for employees and other investor groups. That's leading the cybersecurity company to enact a 3-for-1 split, bringing the share price below $200 apiece, a more affordable number for investors with limited financial resources.
However, with all eyes on the stock split, many investors completely overlooked that Palo Alto Networks also reported its fiscal fourth-quarter results. That caused them to miss some pretty impressive numbers, led by its strong adjusted free cash flow. Here's a closer look at why it's more important than the company's upcoming stock split.
Cashing in on cybersecurity
Palo Alto Networks posted strong fiscal fourth-quarter results. Revenue surged 27% to $1.55 billion, coming in toward the high end of its target range. Meanwhile, non-GAAP income improved from $161.9 million, or $1.60 per share, to $254.1 million, or $2.39 per share, which exceeded the high end of its $2.26 to $2.29 per share guidance range.
However, the number that really stood out in the quarter was adjusted free cash flow. Palo Alto produced $485 million of adjusted free cash flow, giving it an impressive 31.2% adjusted free cash flow margin. Overall, Palo Alto converted a third of its revenue into free cash during the fiscal year.
The cybersecurity company expects to produce even more free cash in its 2023 fiscal year. It sees revenue rising another 25% to between $6.85 billion and $6.9 billion. Meanwhile, it expects its adjusted free cash flow margin to be 33.5% to 34.5%. That implies it will produce between $2.3 billion and $2.4 billion of adjusted free cash flow over the next year.
Why free cash matters more than the stock split
While Palo Alto's stock split will triple its outstanding diluted share count from 112.1 million to 336.3 million, it won't affect the company's underlying value one bit. Investors will still own the same-size slice of the pie, except each one will be cut into three pieces instead of one.
On the other hand, free cash flow can increase the company's underlying value. Palo Alto can use that money to make investments, complete acquisitions, and repay debt. The company closed one small acquisition in the quarter. It also plans to invest $190 million to $200 million into its business over the next year. These investments should help grow its revenue and earnings at above-average rates, key to increasing shareholder value.
Palo Alto can also return money to investors through dividends and share repurchases. It's already doing the latter, buying back 755,000 shares in the fourth quarter at an average price of $483 for a total of $365 million. The company recently authorized an additional $915 million in repurchases, increasing its authorization to $1 billion.
These repurchases are helping offset the dilution of stock-based compensation. Thanks to its buyback program and a decision to reduce stock-based compensation, Palo Alto expects its outstanding shares to dip slightly in its fiscal first quarter and remain roughly flat with the fourth quarter's total for the full year. That enables existing shareholders to keep their slice of the company's profits instead of seeing it diluted.
Focus on what matters
While Palo Alto's stock split will enhance its accessibility since it won't cost as much to buy a share, it won't affect the company's underlying value. Because of that, investors should forget about the stock split and focus their attention on what does create value for shareholders: Its ability to produce free cash. It's doing an excellent job generating cash, which it's using to enhance shareholder value. That makes its stock more attractive than the upcoming split.
