Looking into companies that have recently split their stock is a fairly smart investing strategy. It's not that stock splits in and of themselves are special. It's that companies usually split their stock for one reason: The stock price has risen a lot. While some may see that as a red flag, that's a poor way of looking at it. Stock prices rise over the long term when the company is doing well, and finding companies that are doing well is a key part of investing.
One recent stock split is Palo Alto Networks (PANW -0.02%), which split its stock 2-for-1 on Dec. 16. Palo Alto is also a top company in the cybersecurity space, a critical sector slated to see massive growth as we become more reliant on technology.
Palo Alto is a tale of two business segments
Palo Alto Networks is a mixture of old-generation and next-generation security products. It still has its legacy firewall business that it's working on bringing toward next-gen status, but it also has a strong offering of next-gen security tools that incorporate AI. One of the main use cases for this type of software is endpoint protection, which protects network access points like a laptop or computer from being hacked. Palo Alto's platform for this product line was named a leader in this space by Gartner (NYSE: IT), but it's far from the only competitor.
The most popular investing option in this space is undoubtedly CrowdStrike (CRWD 1.75%), which, like Palo Alto, offers a full suite of AI-powered cybersecurity products beyond endpoint protection.
However, Palo Alto may be this space's more attractive investment option.
In first-quarter fiscal year 2025 (ending Oct. 31, 2024), Palo Alto's next-gen security annual recurring revenue (ARR) grew 40% year over year to $4.5 billion. Compared to CrowdStrike, which saw 27% ARR growth to $4 billion, Palo Alto appears to be beating one of the top cybersecurity picks.
That doesn't show Palo Alto's full picture, as its overall revenue growth rate is much slower than that of its next-gen platforms. Total revenue increased 14% year over year to $2.1 billion in Q1, which clearly indicates that its legacy platforms are struggling. As a result, investors must consider the balance between struggling legacy platforms and booming next-gen ones.
This balance looks to be the same moving forward, as management gave investors guidance that overall revenue will rise at a 14% pace for FY 2025 (ending July 31), while next-gen ARR will increase at a 31% to 32% pace.
But is that enough growth to justify the stock price?
Cybersecurity stocks are valued at a premium in the stock market
Because Palo Alto is a profitable business, using an earnings-based metric to assess the stock's valuation is best. Palo Alto had an unusual event in the past 12 months that artificially inflated its earnings per share (EPS) (a one-time tax benefit). So using the forward earnings to value the stock is better than using trailing earnings.
From a forward earnings perspective, Palo Alto trades at an expensive 58 times forward earnings.
PANW PE Ratio (Forward) data by YCharts.
That's not a cheap stock price for a company that's only growing its revenue at a 14% year-over-year pace.
Let's also compare Palo Alto to CrowdStrike using a revenue-based multiple (CrowdStrike teeters between profitable and unprofitable right now). Palo Alto is still far cheaper as it trades for 16 times sales versus CrowdStrike's 24.
While both are dominant in the cybersecurity marketplace, it's safe to say that cybersecurity stocks are very expensive right now. As a result, it may be best to look at a different sector, as there's not a lot of value in Palo Alto's stock, even if it exceeds management's guidance.
