Stock splits are exciting for two big reasons. First, they break a company's shares into smaller, more accessible pieces. Secondly, they are a sign that its equity price might be rapidly growing -- a likely indicator of positive revenue and earnings momentum.
With shares up by 105% and 211% this year alone, Palo Alto Networks (PANW +0.56%) and Nvidia (NVDA 2.24%) have performed well in the wake of their recent stock splits. Let's discuss some reasons why their bull runs might just be getting started in 2024 and beyond.
1. Palo Alto Networks
Palo Alto's stock split occurred in September 2022 and gave investors three lower-priced shares for every one they previously owned. In the following quarters, the cybersecurity leader's equity has performed well -- rising by a whopping 105% in 2023 alone. And this trend has a lot to do with its burgeoning profitability and AI-powered growth drivers.
NASDAQ: PANW
Key Data Points
Hitting public markets through an IPO in 2012, Palo Alto Networks offers software-based cybersecurity solutions to enterprises. This opportunity is growing fast because of the rise of digitization as more companies bring their data storage and workloads online. Palo Alto was quick to implement AI-related tech into its software to autonomously detect system problems and improve response times to cyber threats for its clients.
Fiscal first-quarter revenue increased by a modest 20% to $1.88 billion. But management suggests the softness is because of temporary macroeconomic challenges like high interest rates, which encourage businesses to delay increasing their security spending.
Investors can expect Palo Alto's growth to rebound when these headwinds ease. Meanwhile, the bottom line remains fantastic. First-quarter net income surged from $20 million to $194.2 million, and the company's rapidly improving profitability helps justify its stock's premium valuation of 56 times forward earnings.
2. Nvidia
Nvidia completed its most recent stock split in July 2021, giving investors four shares for every one they previously owned. This move marks the fifth time the chip maker has split its stock to manage its explosive growth since hitting public markets in 1999. AI technology could power the next leg of its relentless expansion.
With shares up 211% year to date, Nvidia's recent stock price growth has been explosive. But this isn't as surprising compared to its phenomenal operational results. Third-quarter revenue surged 206% year over year to $18.12 billion, driven by strength in the data center segment, which involves the sale of advanced AI chips like the h100 and a100 used to train ChatGPT and other advanced generative AI applications.
Image source: Getty Images.
With analysts at Bloomberg expecting the generative AI market to be worth $1.3 trillion by 2032, Nvidia has plenty of room for continued growth as it supplies the chips cloud service providers and other enterprises will need to develop and run these platforms.
With a price-to-sales (P/S) ratio of 26, Nvidia's stock looks expensive compared to the S&P 500 average of 2.5. But this backward-looking valuation metric doesn't account for Nvidia's rapid growth and high net income margin (over 50% in the third quarter). The company's forward price-to-earnings ratio, which uses projected net income, is just 24. This looks like a small price to pay for one of the most supercharged AI stocks available.
Focus on the fundamentals
While a stock split can create a spike of attention in a company, it is important to remember that they have nothing to do with fundamentals. Over the long term, things like revenue, earnings, and valuation are key in determining what a company's stock is worth.
Palo Alto Networks and Nvidia look like great buys because they still trade at reasonable levels relative to their exceptional long-term potential in artificial intelligence and other fast-growing opportunities.
