Palo Alto Networks (PANW -2.72%) shareholders might have noticed some odd movements in their portfolios lately. The shares underwent a 3-for-1 split in mid-September, which pushed the per-share value down and lifted every owner's individual share count.
A split has no economic impact on the value of a business, even though stocks often rise in the wake of a split announcement. Thankfully, there are more enduring reasons to consider an investment in this cybersecurity specialist.
Let's look at three of the biggest.
1. Sales growth is impressive
Many software-as-a-service companies have disappointed investors with slowing growth in the wake of pandemic-related gains in 2020 and 2021. Okta just lowered its annual outlook and announced that it is reevaluating its long-term growth goals after Q2 revenue gains missed expectations.
Palo Alto, which provides firewalls and other tools to secure a company's network, is facing no such problem. Sales rose 27% in the quarter that ended in late July, in fact, and bookings remained strong into the start of the company's new fiscal year. As a result, management in late August forecast another year of over 20% annual sales gains. "Our integrated three-platform strategy continues to drive large deal momentum," CEO Nikesh Arora said in a press release.
2. Profits are here to stay
The biggest knock against Palo Alto Networks' stock in recent years has been a persistent lack of profitability. While it makes sense for management to prioritize growth, and the software-as-a-service model tends to delay earnings in favor of cash flow, it can be jarring to see net losses year after year. This weakness looks worse in 2022, when the cost of financing is rising.
Yet, Palo Alto Networks has made good strides to eliminate this flaw. It achieved profitability for the first time in four years this past quarter, thanks in part to rising prices and a continued shift toward high-value contracts. Gross profit for the last full year jumped to $3.7 billion from $3 billion, and operating losses declined to $188 million from $304 million.
Management is aiming to continue those encouraging trends. Executives are predicting positive net earnings this fiscal year, in fact. "We look forward to again delivering this balance of growth and margin expansion [in 2023]," CFO Dipak Golechha said in late August.
3. The price is right
The best news is that investors aren't being asked to pay a huge premium to benefit from that strong profit growth. Palo Alto Networks' stock is valued at under 10 times annual sales today after having reached over 12 times in early 2022.
Sure, you can own bigger software companies with longer profit streaks for around that price. Microsoft, for example, is valued at about the same level and also comes with a solid dividend. The global software giant should sail through any recession that might hit over the next few quarters, too.
But investors seeking higher growth potential might consider Palo Alto Networks instead. Its focused portfolio of cybersecurity services will likely expand over the next few years as customers seek more comprehensive digital protections.
And the prospects for growing annual earnings from here on out should have investors excited, even if they didn't purchase Palo Alto Networks' stock before the split took effect.
