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Palo Alto Networks: A Hot Stock-Split Stock to Buy Right Now

Motley Fool - Fri Aug 26, 4:05AM CDT

Share prices of Palo Alto Networks(NASDAQ: PANW) shot up more than 12% after the company released fiscal 2022 fourth-quarter results (for the three months ending July 31) on Aug. 22, but the cybersecurity specialist's terrific rally wasn't just driven by an impressive set of numbers.

Palo Alto's revenue and earnings easily beat expectations, and the guidance was solid as well. But at the same time, Palo Alto management announced a 3-for-1 stock split, and that seems to have added to investors' enthusiasm. Let's take a closer look at Palo Alto's performance last quarter and check why this stock-split play could be worth buying before it soars higher.

Palo Alto Networks' fantastic results and guidance point toward a bright future

Palo Alto's fiscal Q4 revenue increased 27% year over year to $1.6 billion. The company's adjusted earnings shot up nearly 50% year over year to $2.39 per share. The numbers exceeded Palo Alto's guidance and were ahead of Wall Street's expectations of $2.28 per share in earnings on $1.54 billion in revenue.

The company's terrific growth was a result of market share gains in the firewall market, according to investment banking firm William Blair, as well as solid demand for cloud security solutions. Palo Alto released 49 major products in fiscal 2022 compared to 29 in fiscal 2021, and that seems to have attracted more users into the company's fold.

For instance, Palo Alto witnessed a 51% year-over-year increase in the number of secure access service edge (SASE) customers last quarter to 3,556. SASE adoption is expected to increase at an annual rate of 28% through 2027, indicating that Palo Alto could continue to enjoy impressive growth in this niche for a long time.

More importantly, Palo Alto's expansive lineup of cybersecurity solutions also encouraged customers to spend more on its offerings. This was evident from the 26% year-over-year increase in the number of active millionaire customers last quarter to 1,240. Palo Alto defines an active millionaire customer as one that has booked contracts worth $1 million or more in the past four quarters.

The combination of a stronger customer base and an increase in spending led to a 40% year-over-year increase in Palo Alto's remaining performance obligations (RPO) last quarter to $8.2 billion. The RPO is a metric that's calculated by adding a company's deferred revenue and the backlog. In simpler words, it is a representation of the total value of customer contracts that have been signed but have yet to be fulfilled.

So the faster pace of growth in this metric as compared to the actual revenue indicates that Palo Alto's impressive growth is here to stay. This is reflected in the company's guidance, as it expects 25% revenue growth in fiscal 2023 to a range of $6.85 billion to $6.9 billion. Palo Alto expects a 25% year-over-year increase in earnings per share to $9.45 per share at the midpoint of its guidance range. What's more, the company expects to become profitable on a GAAP basis as well.

Wall Street would have settled for earnings of $9.26 per share on revenue of $6.73 billion, but the healthy demand for Palo Alto's cybersecurity products led to a robust forecast. All this indicates why Palo Alto stock remains a buy, especially considering the impending stock split.

The stock split could make Palo Alto more attractive

Palo Alto announced a stock split along with its results. Shareholders of record on Sept. 6, 2022, will own three shares of the cybersecurity specialist for each share they hold. So if you hold 10 shares of Palo Alto on the record date, you'll own 30 shares when the split goes into effect on Sept. 13. Palo Alto will start trading on a split-adjusted basis from Sept. 14.

Now, a stock split is nothing but a cosmetic move. It doesn't change the intrinsic value of the shares or the fundamentals of a company. A stock split increases the number of outstanding shares of a company and lowers the price of each share in proportion. However, Palo Alto management said it believes that taking this step will "make our stock more accessible to our employees and investors."

Palo Alto stock was trading at just under $570 per share on Aug. 23. The split could bring the price of each share below $200, assuming the stock doesn't run up higher till the split goes into effect. Management also added that "the stock split may make our stock more accessible to a broader base of investors."

All this indicates that Palo Alto is looking to drum up demand for its shares, and that could lead to a higher stock price in the future as the stock becomes accessible to a wider pool of retail investors. That's why investors looking to add a cybersecurity stock to their portfolios may want to buy Palo Alto Networks straight away before it jumps higher.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.

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