Stock-Split Watch: Is Palo Alto Networks Next?

Cybersecurity giant Palo Alto Networks (PANW -0.84%) split its stock in the fall of 2022. In what’s called a 3-for-1 stock split, each stub of existing Palo Alto stock became three shares on Sept. 14.

Fast-forward to early 2024, and Palo Alto’s stock has soared 154% in 13 months. Should investors expect another stock split in 2024 as share prices move closer to the level that inspired the 2022 split? And what will it mean for investors if Palo Alto makes that move?

Palo Alto’s short stock-split history

As noted earlier, the security expert has split its stock once. Palo Alto shares closed the trading session on Sept. 14, 2022 at $546.18 per share. The next morning, the stock opened up at a split-adjusted $181.11 per share.

That’s almost exactly one-third of the previous day’s closing price, representing a 0.5% price drop. For what it’s worth, the S&P 500 index dropped 0.4% lower over the same single-night span.

In other words, not much had changed, and Palo Alto’s stock simply traded in line with broad market trends on the evening and morning of that stock split. The market cap was still approximately $54.5 billion, just sliced into a different number of stock shares.

There were 112.1 million diluted Palo Alto shares on the open market before the split and 112.8 x 3 = 338.4 million stubs after. The rounding error springs from the company issuing new shares under its stock-based compensation policies.

So what’s the big deal? The stock split didn’t change Palo Alto’s overall market value, as shown by the stable market cap. It simply adjusted the number of shares in each stockholder’s account by three, which drove share prices down to one-third of the previous level. Apart from some accounting acrobatics, not much happened.

That’s as expected. Palo Alto’s stock-split story is not unusual, at all. In fact, this is what you should expect to happen anytime a company splits its shares.

Reverse splits are a somewhat different ball of wax, often meant to artificially lift that stock above the minimum price requirements for listings on the NYSE or Nasdaq stock exchange. But ordinary splits really don’t do much.

The real effects of stock splits

That doesn’t make stock splits completely useless, though. Despite their pure accounting qualities, stock splits actually serve some useful purposes. To wit:

  • Encouraging broader ownership: Lower prices can attract a wider base of investors by making shares feel more attainable.
  • Increasing stock accessibility: The lower per-share price can make shares more affordable to retail investors, especially those who don’t have access to buying fractional shares.
  • Enhancing liquidity: The reduced share price can inspire higher trading volumes, sometimes beyond the multiples used in the split. Richer volume makes the trading experience smoother, thanks to the higher availability of stubs for sale at any given time.
  • Signaling company growth: Splits are often seen as a sign of the leadership team’s confidence in the company’s prospects. The very act of executing the split may send bullish signals to investors and market watchers.

But the greatest of these helpful stock-split qualities is the last one on that list. It’s effectively a vote of confidence in current and future business prospects, issued by the board of directors who are responsible for the company’s long-term direction.

If the board expects share prices to rise so fast it makes ordinary investors uncomfortable, investors should listen. After all, this is a deeply invested group of people with deep insight and understanding of what’s going on.

Palo Alto seems poised for another split — but it’s no big deal

That’s all you need to know about stock splits. Now, would it make sense to run Palo Alto Networks through this process again, just two years after the last split?

Trading at $340 per share today, the stock price is two-thirds of the way back to the $546 level seen just before the 3-for-1 stock split in 2022. The security expert only needs a couple of Street-stumping earnings reports to rise that high, and the company is currently enjoying a long streak of positive earnings surprises.

At the same time, the sophisticated Cortex XSIAM security platform adds high-powered artificial intelligence (AI) analytics to Palo Alto’s security hardware, boosting the overall effectiveness in an age of AI-driven attacks. Customer interest in this solution is high and rising, driving revenues and net income sharply higher:

PANW Revenue (TTM) data by YCharts.

The price seems about right for another split. If not now, then maybe in 2025, given the current market vibes.

Then again, it’s OK if Palo Alto drags its feet on this move. The other split simply tripled the stock’s average trading volumes, right in line with the tripled number of shares on the market. Most investors already have access to fractional shares, entirely removing the price-based bar for minimum investments.

There’s really no reason to hold your breath for Palo Alto’s next stock split — unless you’re craving one of those bullish signs of boardroom conviction, of course. I think the company has earned investor confidence the hard way, with robust market trends and financial results, making accounting tricks like another stock split look redundant.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool recommends Intercontinental Exchange and Nasdaq. The Motley Fool has a disclosure policy.

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