The S&P 500 is in the midst of a market rally that has persisted for more than two years and continues to defy detractors. A solid economic outlook, growing corporate profits, and the vast potential of artificial intelligence (AI) have all helped fuel the market's advances. After gaining 24% in 2023, the benchmark index tacked on gains of 23% in 2024. Market history suggests the S&P will likely continue to climb higher in 2025.
Over the past 50 years, the S&P 500 has generated positive returns 78% of the time. Additionally, following years with successive gains of more than 20%, the S&P has risen 12%, an average, which suggests there's still upside ahead.
There's also been a resurgence in the popularity of stock splits, causing investors to reexamine companies that have split their shares since this corporate action has historically been preceded by strong operating and financial results, helping drive the stock price higher.
Let's review two companies with impressive track records that are worth a look.
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1. Arista Networks
The first long-term winner investors should be watching is Arista Networks (ANET +8.35%). The stock has gained 66% over the past year and is up 2,880% over the past decade (as of this writing). This performance encouraged management to conduct a 4-for-1 stock split, which was completed in December. Despite the company's long track record, the advent of generative AI a couple of years ago represents a compelling opportunity that has only just begun.
Arista Networks claim to fame was the development of groundbreaking network switches that connect high-speed servers and other devices on a network with near instantaneous response times. The company now boasts a whole suite of offerings that includes switches, routers, and other networking equipment used to speed data between servers, data centers, and across networks. Arista recently developed custom Ethernet systems designed to meet the rigorous demands of the large language models (LLMs) that form the foundation of AI.
In the third quarter, Arista generated revenue of $1.8 billion, up 20% year over year and 7% sequentially. This generated earnings per share (EPS) of $2.33, an increase of 35%. The results easily surpassed Wall Street's expectations and management's previously issued guidance. Shareholders are looking forward to a similar performance when Arista releases its fourth-quarter results after the market close on Tuesday, Feb. 18.
NYSE: ANET
Key Data Points
As the bull market continues to run, investors are becoming more aware of rising valuations. Arista Networks is currently selling for 56 times earnings, which would make the stock unattractive to some investors. However, its forward price/earnings-to-growth (PEG) ratio -- a metric that's more appropriate for high-growth stocks -- comes in at 0.95, when any number less than 1 is the standard for an undervalued stock.
The company's Ethernet and data center expertise is making it a key player in the AI revolution. Add to that Arista Networks' long history of successful execution and its reasonable valution, and its clear why the stock is a buy.
2. Palo Alto Networks
Another company investors should have on their shortlist is Palo Alto Networks (PANW +1.76%). The stock is essentially flat over the past year but is up 813% over the past decade (as of this writing). This company's long history of performance prompted management to declare a 2-for-1 forward stock split that was completed late last year. The cybersecurity company made a strategic business decision last year that sent fair-weather investors running for the exits -- and therein lies the opportunity.
Most companies have a cybersecurity system that is cobbled together from a variety of vendors, leaving gaps that hackers can exploit. The resulting data breaches and unauthorized intrusions can cost these businesses millions of dollars and the loss of customer confidence. Palo Alto addressed this issue by consolidating its individual modules into a unified protection platform integrated with AI. To sweeten the deal further, Palo Alto offered free services to brdige the gap for customers (and potential customers) that had obligations with multiple vendors and varying contract expiration dates.
This strategy was a risky one, but management reports it has shown early success. Customers have been "signing larger transactions" in response to these changes, which "deliver better security outcomes," according to CEO Nikesh Arora. Customers have a "significant incentive" to avail themselves of the company's full suite of offerings: security operations, cloud security, and network security.
NASDAQ: PANW
Key Data Points
During its fiscal 2025 first quarter (ended Oct. 31), Palo Alto returned to growth sooner than expected, generating revenue that grew 14% year over year to $2.1 billion, resulting in EPS that surged 77% to $0.99. Even more telling, annual recurring revenue from the company's next-generation security services increased 40% to $4.5 billion. This is evidence that management's change in strategy is experiencing success.
Investors relying on the most commonly used valuation metrics might be put off, as the stock is selling for 51 times earnings (as of this writing). However, its PEG ratio of 0.15 is a clear indication that Palo Alto Networks is cheaper than it looks.
