Stock splits tend to capture investors' attention and create excitement. On the surface, a split doesn't really matter, as there is no direct effect on the value of your shares. However, there are plenty of ancillary issues to consider. A stock split indicates that shares have markedly increased in value, and investors should take the opportunity to examine why the company has been so successful.
Cybersecurity juggernaut Palo Alto Networks (PANW +1.58%) will soon execute its first stock split.
NASDAQ: PANW
Key Data Points
What investors need to know
Before we look at what drives Palo Alto's success, let's look at key info investors should know. Palo Alto will split its stock 3:1, which means investors will get an additional two shares for each share they own. The stock trades for around $540 right now, so shareholders will end up with three shares valued at $180 for each share they own if this price holds.
The payment date is Sept. 13, and the stock will begin trading split-adjusted on Sept. 14. Feel free to sit back and relax, as there is nothing you need to do as a shareholder -- your broker will take care of it automatically.
Why do companies split their stocks if there isn't any direct effect on the business's value? There are several reasons, but the biggest is to help retail investors and employees. High-dollar stocks can be cumbersome and intimidating. The split makes it more accessible.
The stock split also makes it easier to compare Palo Alto's price and performance to its peers. For example, Fortinet (FTNT +1.70%), one of the company's biggest competitors, split its stock 5:1 in June. This sent Fortinet's stock price from around $300 pre-split to around $60 after the split.
Is Palo Alto stock a buy?
Although the Palo Alto stock split might provide a short-term boost for the stock, the company's performance is a key reason to be excited about it for the long run.
Specifically, Palo Alto's Q4 and fiscal 2022 earnings were stellar. The company continues to be a dominant force in the cybersecurity industry. Monster increases in revenue, free cash flow, and remaining performance obligation (RPO) were highlights.
Sales rose 28% from $4.3 billion to $5.5 billion, and Palo Alto is guiding for another 25% jump next year. As the company grows, it is becoming more efficient, and free cash flow has more than doubled over two fiscal years. The RPO -- revenue recognized in future periods -- is also strong, which suggests that growth will continue. The chart below depicts the massive success.
Data source: Palo Alto. Chart by author.
This performance has helped the stock more than double in the last two years.
Cybersecurity is essential to our economy, government, infrastructure, and everyday life. And the threats aren't going away -- in fact, they're increasing. Palo Alto's network and security solutions are in high demand, as the company is an industry leader.
A stock split may provide a short-term boost to the stock, but Palo Alto's outstanding results should continue to drive long-term profits for shareholders.
