Palo Alto Networks (NASDAQ: PANW)one of the world’s largest cybersecurity companies, has split its shares only once since its initial public offering (IPO) in 2012. This 3-for-1 stock split occurred after the market closed on September 13, 2022.

Before this split took effect, Palo Alto Networks stock closed at $548.88 per share. It opened at $183.75 the following day and eventually doubled to an all-time high of $376.90 on February 9, 2024. It currently trades for just under $330.

Should investors expect this bellwether of the cybersecurity industry to undergo another stock split in the near future?

Image source: Getty Images.

Are stock splits important for long-term investors?

Stock splits often attract a lot of attention because they lower the trading price of each share. Some retail investors might view this price reduction as an opportunity to buy more shares of a stock that has been trading at much higher prices.

However, stock splits do not inherently make a company’s stock cheaper, as they simply break a larger share into smaller pieces. So instead of buying a whole pizza for $20, you buy just a quarter slice for $5. A stock’s key valuations – such as its price-to-earnings ratio or price-to-sales ratio – do not decline after a stock split.

Stock splits made more sense when investors could only buy individual shares of a stock. However, most brokers now allow investors to trade fractional shares without paying commission – so stock splits are not as important as they once were.

Stock splits generally shouldn’t be a big deal for long-term investors, but they still offer certain benefits to options traders and employees. Stock splits make options trading cheaper because each contract is tied to 100 shares. That adds up quickly when the stock is trading for hundreds of dollars per share. They can also make it easier for a company to pay its employees with more detailed and flexible stock-based compensation plans.

Will Palo Alto stock continue to rise and split?

Based on the previous split, Palo Alto could wait for the stock price to continue rising before considering another split. However, slowing growth in revenue, sales and earnings per share over the past year suggests that the upside may be limited.

Data source: Palo Alto Networks. YOY = Year-over-year. (Palo Alto’s fiscal year ends in July.)

Palo Alto operates three main ecosystems: Strata, which hosts its legacy firewalls and network security services on-premises; Prisma, which manages its cloud-based security services; and Cortex, which develops AI algorithms for threat detection. Most of its recent growth has been driven by Prisma and Cortex, which the company calls its “next-gen security” (NGS) services, rather than Strata’s legacy products and services.

However, Palo Alto’s revenue growth slowed as macroeconomic headwinds made it harder to win new customers and higher-value contracts and the company faced stiff competition. Fortinet (NASDAQ:FTNT)which offers similar services based on its own customized chips; CrowdStrike (NASDAQ:CRWD)that delivers cloud-native services instead of on-premises devices, and AI-driven challengers such as SentinelOne (NYSE:S).

To fend off competition, Palo Alto is rolling out more services that compete directly with smaller, niche cybersecurity companies. The company is bundling these services with its core services in a “platformization” strategy that is supposedly designed to drive out competition and stabilize long-term growth – but right now the company is driven by free trials and deferred revenue deals. In other words, Palo Alto is trying to widen its moat with loss-making strategies.

For fiscal 2024, Palo Alto expects revenue growth of 10% to 11%, a 16% increase in sales, and a 25% to 26% increase in adjusted earnings per share. These growth rates are stable, but for a stock trading at 53 times forward earnings, they’re not all that impressive. Fortinet, which is growing only slightly slower, has a lower forward earnings multiple of 37.

Don’t expect Palo Alto stock to rise and split

Palo Alto shares are up more than 10% in the past week, but those gains appear to be driven more by CrowdStrike’s catastrophic outage in late July than by any major news about the company. CrowdStrike’s misstep may gradually drive some companies toward other cybersecurity firms like Palo Alto, but customers are still locked into the contracts, the cloud-based services are tough, and switching costs are high.

Therefore, it is too early to assume that CrowdStrike’s losses will generate long-term gains for Palo Alto and its other competitors. So instead of wondering if Palo Alto’s stock will rise and split, investors should focus on the upcoming quarterly report on August 19 to see if the company can stabilize its revenue growth with its risky platform strategy.

If that doesn’t work, the stock could easily lose its premium valuation and experience a post-earnings plunge. And that’s not exactly the ideal situation for a stock split.

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Leo Sun does not own any stocks mentioned. The Motley Fool owns and recommends CrowdStrike, Fortinet, and Palo Alto Networks. The Motley Fool has a disclosure policy.