Stock splits have been all the rage this year as several prominent companies have decided to go down this path to lower their share prices and boost the demand among retail investors at a time when the broader market has been in sell-off mode, but even this move hasn't given them reprieve on the stock market.
Palo Alto Networks (PANW +5.78%), for instance, announced a three-for-one stock split on Aug. 22. Shares of the cybersecurity specialist shot up following the announcement, but they have lost momentum since thanks to the Federal Reserve's hawkish nature that has been weighing on the stock market this year.
Semiconductor giant Nvidia (NVDA +1.73%), which announced a four-for-one stock split in May last year, has also witnessed a similar fate. The chipmaker's stock surged for a few months following the announcement, but it has witnessed a brutal sell-off this year. All this makes it evident that stock splits don't guarantee upside for investors on the market.
After all, a stock split is just a cosmetic move that increases the number of outstanding shares of a company and lowers the stock price. It doesn't impact the fundamentals or the prospects of a company. That's why beaten-down stock-split plays such as Palo Alto Networks and Nvidia seem worth buying, as they are not only trading at relatively attractive valuations right now, but the growth drivers they are sitting on could supercharge their stock prices in the long run.
Let's look at the reasons why these two tech stocks could double investors' money.
1. Palo Alto Networks
The cybersecurity industry is built for long-term growth, and Palo Alto Networks is one of the best ways to take advantage of this space. That's because Palo Alto's rapid growth suggests that it is gaining a share in this lucrative niche.
NASDAQ: PANW
Key Data Points
For instance, the cybersecurity market reportedly clocked an annual growth rate of 8% to 11% between 2016 and 2021, per third-party estimates. Palo Alto's annual revenue has increased much faster over the last five fiscal years. The company's revenue in fiscal 2017 stood at $1.75 billion. In fiscal 2022 (for the 12 months ended on July 31, 2022), Palo Alto reported total revenue of $5.5 billion. This translates into a compound annual growth rate (CAGR) of nearly 26% over the past five fiscal years.
The good part is that cybersecurity spending is expected to head higher. According to Gartner, cybersecurity spending could jump from $172.5 billion in 2022 to $267.3 billion in 2026 at a CAGR of 11%. It won't be surprising to see Palo Alto outgrow the cybersecurity market in the future, thanks to the healthy demand for the company's offerings that are allowing it to build a solid revenue pipeline.
Palo Alto expects year-over-year revenue growth of 25% in fiscal 2023 to a range of $6.85 billion to $6.9 billion. What's more, the company's remaining performance obligations of $8.2 billion, which were up 40% year over year last quarter, suggest that it could grow at a faster pace. That's because the remaining performance obligations refer to the value of customer contracts that are yet to be fulfilled. The metric is significantly higher than what Palo Alto is projecting as revenue this fiscal year.
So, it won't be surprising to see the company grow at a faster rate than what it is projecting. Even better, analysts are expecting Palo Alto's earnings to increase at an annual rate of nearly 26% over the next five years. The company posted $2.52 per share in adjusted earnings last fiscal year, which indicates that its earnings could increase to $8 per share in five years.
Multiplying the projected earnings after five years with Palo Alto's five-year average forward earnings multiple of 50 would translate into a stock price of $400, which would be more than double the cybersecurity company's current stock price of around $160.
2. Nvidia
Nvidia stock's 60%crash in 2022 means that the chipmaker is now trading at an attractive valuation. Nvidia's trailing price-to-earnings (P/E) ratio of 37 represents a big discount over its five-year average earnings multiple of 58.
NASDAQ: NVDA
Key Data Points
The stock could head lower in the near term as the weakness in the demand for graphics cards used in gaming personal computers (PCs) and the ban on sales of chips used in supercomputers to China are likely to impact investor sentiment negatively. However, investors may want to take advantage and buy Nvidia stock if it declines further.
After all, analysts are upbeat about the company's long-term prospects, forecasting 23% annual earnings growth for the next five years. That isn't surprising given Nvidia's solid growth drivers that could help it regain its mojo in the long run.
Nvidia has started tapping markets that could become huge in the long run. For instance, the company's digital twin solutions are gaining traction. Multiple customers are opting for Nvidia's Omniverse solutions to create virtual 3D representations of real-world objects or processes, which are popularly known as digital twins.
Similarly, the data center space should present a secular growth opportunity for the company despite the ban on sales of chips to China. Nvidia doesn't expect the new restrictions to impact its financial performance in the near term, while the long-term prospects appear to be solid. That's because the data center accelerator market is expected to grow nearly 5x in the next five years and hit $65 billion in revenue by 2026.
The company is setting itself up to take a bigger chunk out of that market with its new server processors, a market that could give it a big long-term boost.
As such, it won't be surprising to see Nvidia clock the impressive growth that analysts are expecting. The company reported $4.44 per share in earnings last year, and the 23% annual growth suggested above could take its bottom line to nearly $12.50 per share after five years. Multiplying the projected earnings with Nvidia's forward earnings multiple of 26 would translate into a stock price of $325, which would easily be more than double its current stock price.
