Stock Split Watch: Is Palo Alto Networks Next?

Cybersecurity giant Palo Alto Networks (PANW -0.93%) The stock will be split in the fall of 2022. In what is called a 1-for-3 stock split, each half of the existing Palo Alto stock became three shares on September 14.

Fast-forward to early 2024, and Palo Alto’s stock price has soared 154% in 13 months. With the stock approaching the levels that inspired the 2022 split, should investors expect another stock split in 2024? If Palo Alto were to take that step, what would it mean for investors?

A brief history of stock splits in Palo Alto

As mentioned earlier, the security expert split the stock once. Palo Alto stock closed the trading session on September 14, 2022 at $546.18 per share. The next morning, stocks opened at a split-adjusted $181.11 per share.

This is almost exactly one-third of the previous day’s closing price, meaning a 0.5% price decline. For what it’s worth, S&P 500 Overnight, the index fell 0.4%.

In other words, not much changed, and Palo Alto’s stock simply traded in line with the broader market trend on the evening and morning of the stock split. The market capitalization was still around $54.5 billion, we just split the number of shares differently.

Before the split, there were 112.1 million shares of diluted Palo Alto stock on the public market, and after the split, there were 112.8 million x 3 = 338.4 million stubs. Rounding errors occur in companies that issue new shares under a stock-based compensation policy.

So what’s the big deal? The stock split did not change Palo Alto’s overall market value, as can be seen from its stable market capitalization. By simply adjusting the number of shares in each shareholder account by three, the stock price was lowered to one-third of its previous level. Aside from some accounting stunts, not much happened.

It’s as expected. Palo Alto’s stock split story is not unusual at all. In fact, this is expected to happen whenever a company splits its stock.

A reverse split is a somewhat different ball of wax, often intended to artificially elevate a stock above the minimum price requirement for listing on the NYSE or Nasdaq stock exchanges. But a normal split doesn’t really do much.

Actual Effects of a Stock Split

That doesn’t make stock splits completely useless. Despite their purely accounting nature, stock splits actually serve several useful purposes. To wit:

• Encouraging broader ownership: A lower price can attract a broader investor base by creating the feeling that the stock is easier to obtain.
• Improved inventory accessibility: A lower price per share makes shares cheaper to purchase for individual investors, especially those who cannot afford to purchase fractional shares.
• Enhancing Liquidity: As the stock price falls, trading volume increases, sometimes exceeding the multiple used for the split. Higher trading volume means higher availability of stubs available for sale at any time, making your trading experience smoother.
• Signs of company growth: A split is often seen as a sign of the leadership team’s confidence in the company’s prospects. The very act of executing a split can send a bullish signal to investors and market observers.

But the greatest of these useful stock split characteristics is the last one on that list. It is a de facto vote of confidence in current and future business prospects issued by the board of directors responsible for the long-term direction of the company.

If the board expects the stock price to rise too quickly and make retail investors uncomfortable, investors should listen. After all, this is a group of deeply invested people with deep insight and understanding of what is going on.

Palo Alto seems ready for another split, but it’s not a big deal.

This is everything you need to know about stock splits. Now, two years after the last split, does it make sense to put Palo Alto Networks through this process again?

Currently trading at $340 per share, the stock is two-thirds the $546 level it was worth just before the 2022 3-for-1 stock split. All a security professional needs is a couple of hefty revenue reports. It has risen to those heights, and the company has now enjoyed a long history of positive earnings surprises.

At the same time, the sophisticated Cortex XSIAM security platform adds high-performance artificial intelligence (AI) analytics to Palo Alto’s security hardware, increasing overall effectiveness in the era of AI-based attacks. Customer interest in this solution is growing, resulting in significant increases in sales and bottom line.

PANW Revenue (TTM) data from YCharts.

The price seems right for another installment. If not now, it could be 2025 given the current market sentiment.

If so, it’s okay if Palo Alto drags its feet on this move. The other split simply tripled the stock’s average trading volume, which coincided with a tripling of the number of shares on the market. Most investors already have access to fractional shares, completely eliminating the price-based criteria for minimum investment.

There’s no reason to hold your breath for Palo Alto’s next stock split. Unless, of course, you’re craving one of the more optimistic signs of the board’s confidence. I think the company has earned investor trust the hard way with solid market trends and financial results, making accounting tricks like another stock split seem unnecessary.