Good companies tend to create lots of value over the long term, which can drive their stock price into the hundreds or even thousands of dollars. That makes it difficult for retail investors to buy into the story unless they use a broker which offers fractional shares.
A stock split can remedy that by increasing the number of shares a company has in circulation, which reduces its price per share proportionately. The maneuver is purely cosmetic, so it doesn't change the value of the underlying company, but it can make the stock more accessible to small investors.
Palo Alto Networks (PANW +1.35%) is the world's largest cybersecurity company, and it executed a 2-for-1 split on Dec. 13. It increased the number of shares in circulation twofold and organically cut the company's stock price in half. It was the cybersecurity giant's second split in two years, which highlights how much value it's creating for shareholders.
Palo Alto is preparing its customers for a world dominated by artificial intelligence (AI), which could drive a new wave of value for the company over the long term. So here's why investors with a spare $200 might want to put it toward buying one share in this exciting story.
NASDAQ: PANW
Key Data Points
A growing portfolio of AI cybersecurity products
Palo Alto offers dozens of cybersecurity products spread across three platforms: cloud security, network security, and security operations. The company says there are tangible signs that bad actors are using AI to accelerate their attacks, so it's fighting fire with fire by weaving AI into as many of its products as possible to drive faster threat detection and incident response.
Large organizations which rely on human-led processes to manage their security operations centers are going to fall behind the curve because they simply can't keep up with the high volume of modern threats. That's why Palo Alto launched the AI-powered XSIAM security operations platform, which reduces the burden on human managers through automation.
Thanks to XSIAM, one customer now resolves incidents in an average of just 16 minutes, which is down from three days previously, despite processing 10 times more data. Many other customers are experiencing a significant reduction in the number of incidents requiring manual investigation, which means fewer threats are slipping through the cracks. At the end of the fiscal 2025 second quarter (ended Jan. 31), XSIAM had accumulated over $1 billion in bookings, which is an exciting milestone considering the product launched just three years ago.
But Palo Alto is also working to protect organizations using AI in their day-to-day operations. Many of them are plugging their sensitive data into AI models from third-party developers like OpenAI, creating a new attack surface which requires advanced protection.
The company launched a platform called AI Access Security late last year, which already has over 300 paying customers. It's designed to secure critical data and identify threats when organizations are using those third-party models, and it already offers coverage for 1,800 different AI apps, up from just 500 six months ago.
Image source: Getty Images.
Strong revenue growth driven by "platformization"
According to management's most recent guidance, Palo Alto is on track to generate around $9.1 billion in total revenue during fiscal 2025 (ending July 31), which will be a 14% increase from the prior year. However, over half of that revenue will come from its next-generation security (NGS) portfolio, which includes AI products like XSIAM.
At the end of the second quarter, annual recurring revenue (ARR) from NGS came in at a record $4.8 billion, which was up 37% compared to the year-ago period. The strong result highlights the growing demand for AI-powered cybersecurity, but a phenomenon called "platformization" also played an important role.
The cybersecurity industry has a history of fragmentation because vendors often specialized in specific products and services. That meant businesses had to piece their security stack together from several different providers. As I mentioned earlier, Palo Alto offers three core platforms, which combine to provide a complete solution for every organization.
Platformization is the process by which Palo Alto convinces customers to use its products for all of their cybersecurity needs. That doesn't mean they adopt all three platforms because some businesses might only need cloud security, for example.
However, during Q2, Palo Alto saw a 50% year-over-year increase in the number of customers adopting two of its platforms, and the number of customers who adopted all three tripled. NGS products like XSIAM are a big driver of platformization because they are most effective when deployed in tandem with Palo Alto's other products. Of the company's top 5,000 customers, 1,150 are now considered to be platformed.
This strategy is going to drive significant long-term value for Palo Alto because once a customer is locked in, it becomes very inconvenient for them to migrate to a competitor. Plus, the company can extract more spending from its customers each time it launches a new product, with minimal additional sales costs.
Why Palo Alto stock is a long-term buy
Palo Alto stock is trading at a price-to-sales (P/S) ratio of 17.1, which is a notable premium to its five-year average of 10.7. However, the stock is still much cheaper than its main rival in AI-powered cybersecurity, CrowdStrike:
CRWD PS Ratio data by YCharts.
But here's why it's so important to take a long-term view when investing in Palo Alto stock: The company is aiming to triple its platformed customers to 3,500 by fiscal 2030, potentially translating into $15 billion in NGS ARR by then, which is also triple the recent Q2 result.
If we assume the company will achieve $15 billion in annual NGS revenue, its forward P/S ratio becomes just 8.7. Therefore, its stock price would have to almost double over the next five years just to maintain its current P/S ratio of 17.1.
But even at that point, Palo Alto would have captured a mere fraction of its addressable market. According to a study by Fortune Business Insights, the cybersecurity market was worth $193.7 billion last year, and it's growing at a compound annual rate of 14.3%. That means it could be valued at $377.9 billion in five years' time, so Palo Alto's $15 billion in NGS ARR would still be a drop in the bucket. That paves the way for even more potential growth than the company is expecting.
As a result, investors with a spare $200 should certainly consider adding Palo Alto stock to their portfolio.
