Stock splits don’t create any real value for shareholders. However, they do have some tangible benefits. For example, they can make a company’s stock more accessible to investors, since it will have a lower post-split trading price.
That’s certainly the case for cybersecurity giant Palo Alto Networks (PANW -3.20%). Shares went from a pre-split price of more than $500 a share to a post-split price recently in the $170s following its 3-for-1 stock splits a few months ago. That’s a much more accessible level for my strategy of investing dividends into growth stocks. Given the projected dividend payments I should receive this month, I’ll have enough cash to buy another share of Palo Alto before the year ends.
Palo Alto Networks has many characteristics I like to see in a growth-focused investment. For starters, it’s growing at an above-average rate. The company recently reported its fiscal first quarter results, delivering 25% year-over-year revenue growth. Revenue reached $1.56 billion, slightly above the top end of its guidance range. It also delivered its second straight quarter of GAAP profits after four consecutive years of posting losses. Meanwhile, operating income jumped 44% to $322 million. The company continues to expand its margins as it scales.
A big growth driver for Palo Alto Networks has been its Next-Gen Security platform. The company grew its annual recurring revenue (ARR) from this segment by 67% over the past year to $2.11 billion. It continues to benefit from its investments in product innovation that are expanding its offerings, enabling it to grab a greater share of the large and growing cybersecurity market.
Despite a challenging macroeconomic environment, Palo Alto Networks expects to grow briskly this year. The company sees revenue rising by 20% to 22% while Next-Gen ARR grows faster at 40% to 43%. That’s higher than its initial guidance (20% to 21% for revenue and 37% to 40% for Next-Gen ARR), suggesting that customers are increasingly choosing its solutions over rival offerings.
A pillar of financial strength
Another thing Palo Alto Networks brings to the table is a rock-solid financial foundation. The company ended its fiscal first quarter with $3.8 billion of cash and short-term investments. That compares to less than $3.7 billion of debt in the form of convertible senior notes.
Meanwhile, the company is generating free cash flow. It produced $1.2 billion of adjusted free cash flow in the first quarter, two times more than its prior high. However, that’s due largely to strong collections in the period.
The company expects to produce significant free cash flow this year. It anticipates its free-cash-flow margin to be between 34.5% and 35.5% of sales (up from its initial 33.5% to 34.5% outlook). With revenue on track to reach $9 billion, the company could produce more than $3 billion of free cash flow this year.
Palo Alto’s cash-rich balance sheet and cash-flowing business give it tremendous financial flexibility. That’s a competitive advantage, given the current economic uncertainty. It’s allowing the company to continue making investments in product innovation, which could allow it to expand its market share further. For example, it recently agreed to acquire Cider Security for $195 million in cash to enhance its Prisma Cloud platform.
The company also has the flexibility to opportunistically repurchase its stock. Palo Alto authorized an additional $915 million to share repurchases earlier this year, increasing its capacity to $1 billion. The company can buy back shares if the stock price swoons to increase shareholder value.
My type of growth stock
Palo Alto has a lot of growth ahead of it as the company capitalizes on the rapidly expanding cybersecurity market. It’s in a strong position to capture this opportunity, thanks to its solid balance sheet and cash-flowing business. Because of that, it fits the profile of the growth stock I seek to buy. With shares now priced lower thanks to its recent stock split, I plan to buy another one before the year ends.
Matthew DiLallo has positions in Palo Alto Networks. The Motley Fool has positions in and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.