A stock split doesn't add any real value to the underlying company that executes it, but the move still tends to generate some enthusiasm because there's a perception it can attract new money from retail investors. One of the goals of a stock split, after all, is to reduce a company's price per share to make it more accessible to those with smaller portfolios.
Take Palo Alto Networks (PANW 4.19%), for example. It completed a 3-for-1 split in September, which shrank its stock price from over $500 to $174 as of this writing. Aside from the stock becoming cheaper for investors, the company's other goal was to make it more affordable for employees to participate in share plans.
But as positive as those things sound, they're not reasons to own this stock for the long term. Instead, investors should focus on Palo Alto's incredible cybersecurity business, which has Wall Street very bullish. Of the 36 analysts covering Palo Alto stock (as tracked by The Wall Street Journal), not a single one recommends selling. Here's why.
Cybersecurity: A rapidly growing need
The way companies protect their digital assets has changed drastically in the last two decades. In the past, bad actors were kept at bay using tools like firewalls and antivirus software, which were installed locally. Plus, businesses were less reliant on the internet to run day-to-day operations, which meant they were less exposed to cyber risk.
But the onset of cloud-computing technology has led to a mammoth shift in that mindset. Now, companies can migrate their core operations online seamlessly, which has made them much more efficient and capable of serving customers' needs. For larger organizations, the cloud is also a critical tool used to connect their employees, allowing them to collaborate on tasks no matter where they are in the world.
The downside to that approach is the avenues for cyberattacks are now considerably larger, leaving companies exposed to threats around the clock from practically anywhere. Palo Alto Networks offers cybersecurity tools in three main categories: network security, cloud security, and security operations. Each contains myriad solutions, which have propelled the company to a leadership position in 11 different categories.
Following countless high-profile data breaches and attacks on the corporate sector, cybersecurity is now a necessity. In fact, global consulting firm PricewaterhouseCoopers recently surveyed 722 business leaders and found that cyber risk was their top concern -- outranking the risk of a recession and supply chain disruptions.
It's no surprise, then, that Palo Alto Networks has seen large organizations flocking to its tools at an elevated pace over the last two years. Its base of active millionaire customers, defined as those spending $1 million or more annually on the company's products and services, continues to soar to new highs.
Palo Alto's revenue is growing rapidly
More customers -- particularly large ones -- result in more sales. Palo Alto generated $5.5 billion in revenue during fiscal 2022 (ended July 31), which represented a 29% increase year over year. That was an accelerated growth rate compared to both last year and fiscal 2020.
That's quite an accomplishment given the current economic climate, where many other companies in the technology sector are slashing their forecasts. Though Palo Alto is guiding for marginally slower sales growth in fiscal 2023, it's still slated to deliver $6.85 to $6.90 billion in revenue, which adds to a string of record annual results.
The company isn't profitable yet on a GAAP basis, posting a loss of $267 million in fiscal 2022. But after backing out line items such as stock-based compensation and one-off acquisition costs, it actually generated adjusted net income of $824 million.
The good news is Palo Alto estimates its bottom line could be in the black on both a GAAP and non-GAAP basis in fiscal 2023.
Wall Street is on board with Palo Alto Networks' stock
For much of this year, Wall Street analysts have been pulling back on their bullish sentiment from 2021, but that's not the case when it comes to Palo Alto Networks. Of the 36 analysts covering its stock, 80% of them have given it the highest possible buy rating.
The remaining 20% are split between overweight (bullish) and neutral ratings, with not a single one recommending selling.
But that's reminiscent of the Street's attitude toward cybersecurity in general. According to an estimate by Cybersecurity Ventures, spending on cyber tools could top $1.75 trillion between 2021 and 2025. The simple fact is companies will have no choice but to adopt more advanced solutions going forward, particularly those that protect the cloud, and Palo Alto is a best-in-class provider.
