U Nasdaq Composite (^IXIC 0.12%) has been on a roll for more than two years, with its gains fueled by improving economic conditions, the dawn of artificial intelligence (AI), an uncontested US election, and recent tax cuts interest from the Federal Reserve Bank. After growing 43% in 2023, the technology-focused index has gained about 31% in 2024 (as of this writing).
Still, students of market history will note that the rally likely has additional upside ahead. Going back to 1972 – the first full year in which the Nasdaq traded – in any year. following gains of 30% or more, the tech-centric index climbed 19%, on average, which suggests that the Nasdaq will continue to gain in 2025.
Additionally, the recent resurgence of forward stock splits has investors taking a fresh look at companies that have split their stock, as this is normally preceded by years of robust operational and financial growth, fueling an increase in its share price. Let’s look at two companies that should be on the investors’ short list.
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1. Palo Alto Networks
A long-term winner that investors should consider is Palo Alto Networks (PANW -1.77%). The stock has delivered gains of 32% so far this year and 884% over the past decade (as of this writing), prompting the company to initiate a 2-for-1 forward stock split that is expected to conclude this week. Despite the stock’s blockbuster performance in recent years, the company is benefiting from secular headwinds that show no signs of slowing down.
The headlines are full of details of the devastating impact of data breaches, hacks and intrusions, and the situation is only going to get worse from here. Palo Alto Networks has a long history of innovation in cybersecurity, and the company recently took a bold step to help customers strengthen their defenses against unauthorized access.
Using multiple security vendors can leave gaps in a system that hackers can exploit, so Palo Alto has simplified its security architecture and consolidated its individual solutions into platforms with a focus on artificial intelligence (AI). It also took the bold step of offering free services to fill the gap for customers who switched to one of its three platforms.
This was a risky strategy, but it seems to be paying off, as Palo Alto has signed bigger deals and expanded relationships with its existing clients. In addition, customers have a “significant incentive” to eventually adopt all three of the company’s security platforms: cloud security, security operations and network security.
For its fiscal first quarter 2025 (ended October 31), Palo Alto Networks generated revenue that grew 14% year over year to $2.1 billion, while earnings per share (EPS) increased from 77% to $0.99. Additionally, annual recurring revenue (ARR) from its Next Generation Security Services (NGS) grew 40% to $4.5 billion. This illustrates that the management strategy is bearing fruit.
Palo Alto Networks isn’t cheap when viewed by the most common valuation metrics — which tend to fall short when evaluating a high-growth company. However, using the price/earnings-to-growth (PEG), which factors in its accelerated growth, it is set at 0.15, when any number less than 1 is the standard for an undervalued stock.
That’s why Palo Alto Networks is a buy.
2. Broadcom
Another long-term winner that investors should keep on their short list is Broadcom (AVGO 24.43%). The stock is up 54% year to date in 2024 and 1,580% over the past 10 years (as of this writing). This encouraged the company to declare a 10-for-1 stock split, which ended in July. Despite its strong earnings, the advent of generative AI early last year acted as a springboard for Broadcom, and there could be much more in store.
While the company is primarily known for its semiconductors, Broadcom provides a wide range of ancillary products across the technology landscape that are essential for directing traffic across the ether and into data centers, which is where most of the AI process. Management notes that “99% of all internet traffic goes through some type of Broadcom technology,” which helps illustrate the company’s reach in the AI ecosystem.
Adding to this opportunity, Broadcom is in the middle of digesting its acquisition of VMware, which weighed on its results. This process is almost complete and things are looking up. Broadcom is working to convert VMware from a perpetual license to a subscription business, and that strategy is paying off. Revenue from the company’s infrastructure software segment – which includes VMware – is up 200% year over year.
For its fiscal third quarter (ended August 4), Broadcom generated revenue that jumped 47% year over year to $13.1 billion, while its adjusted EPS climbed 18% to $1.24. Management expects the current trend to continue, raising its full-year revenue forecast to $51.5 billion, or about 44% growth.
Broadcom’s vast reach in supporting the Internet, accelerating AI adoption, and VMware’s upselling potential show that the future is bright. Still, despite the vast opportunity, the stock is attractively priced at just 28 times forward earnings.