Stock splits are a lot like cutting a pizza. Suppose you have a freshly baked pizza just out of the oven. Then you cut it into four slices. Aside from that tiny bit of cheese and sauce that ends up on your pizza cutter, you end up with the same amount of pizza as before; it's just divided into slices.
Stock splits work the same way. None of the company's fundamentals (e.g., its revenue, earnings, or cash flow) change -- its shares simply end up in smaller, easier-to-handle pieces.
And that's exactly what's happened to Palo Alto Networks (PANW 0.11%). The company completed a three-for-one stock split on Sept. 14. Palo Alto shares -- trading for above $500 before the split -- now trade for under $200.
So, is it worth snapping up shares now that the company has finalized its split? Let's have a closer look.
Image source: Getty Images.
Why bother with the split?
As noted, stock splits don't alter a company's fundamentals. So why do companies split their stock at all? Basically, stock splits generate interest among retail investors. Some investors may not have enough cash in their account to purchase a stock that costs more than $500; others may simply be uncomfortable shelling out that much for a single share.
Whatever the reason, companies know that stocks that trade at high dollar amounts turn off some potential investors. So a stock split is a way to reduce the price and perhaps create additional demand for the stock in the market.
The cybersecurity market is sizzling
Palo Alto Networks is one of the world's leading cybersecurity companies. The company was incorporated back in 2005 and developed legacy security solutions, such as firewall products. However, in recent years, Palo Alto pivoted toward the more innovative -- and lucrative -- field of cloud-based cybersecurity. And with so many organizations shifting to the cloud, cybercrime has skyrocketed.
Why? Well, here's one way to think about it: Imagine you are responsible for securing a warehouse. What if there were only one way in and out? It would be pretty easy to secure. You lock the door; maybe add a security camera.
But what if the warehouse had hundreds of thousands or millions of entry and exit points? It would be difficult, if not impossible, to ensure security. That's the challenge for organizations today. With so much activity funneled through cloud servers, it's tough for organizations to track who is accessing their systems and data. And if hackers get in, the costs can be enormous. IBM estimates that the average cost of a cyberattack in 2022 is now $4.35 million.
Palo Alto's network, cloud, and security solutions help secure its customers' data, servers, and endpoints. And by doing so, it saves them money and gives them peace of mind that they won't appear on front pages as the latest victim of an embarrassing data breach or devastating ransomware attack.
Is Palo Alto a buy after its stock split?
From a financial standpoint, Palo Alto is firing on all cylinders.
In its most recent quarter (the three months ending on July 31), Palo Alto generated $1.55 billion in revenue. Non-GAAP operating income surged to $323 million, up 57% from a year ago, and non-GAAP adjusted free cash flow increased to $485 million.
Earnings per share in fiscal year 2022 (the 12 months ending on July 31) were $2.52, and looking ahead, Wall Street expects Palo Alto to grow earnings per share to $3.16 in fiscal year 2023 and $3.80 in fiscal year 2024.
Between the increasing global demand for cybersecurity, excellent financial metrics, and its recent stock split, I think Palo Alto is a name worth owning.
