When a company announces a stock split, it doesn't change any of the underlying fundamentals of the business or the stock. It merely divides the company into smaller shares for investors, making it easier for retail investors to afford the stock.
However, a stock split can be a strong signal from management that the run-up in price that led it to the split of its shares could continue for the foreseeable future. While that's not always the case, two recent stock-split AI stocks look like they can keep climbing higher from here, and Wall Street agrees.
Lam Research(NASDAQ: LRCX) trades around $75 per share as of this writing, but the median analyst's price target is $100, implying 33% upside.
Palo Alto Networks(NASDAQ: PANW) trades around $180 per share as of this writing, and the median analyst's price target is $225, implying 25% upside.
Here's what investors need to know about these two promising AI stocks.
Image source: Getty Images.
1. Lam Research
Lam Research is one of the leading wafer fabrication equipment manufacturers in the world. In other words, all those AI chips that big tech companies are buying up would be impossible to make without Lam Research's products.
Lam's equipment is particularly useful in the production of memory chips. Memory is an extremely important part of both training larger AI models and on-device AI inference.
As a result, Lam expects to grow its share of the wafer fabrication equipment market, even as the entire market accelerates with demand for AI chips. It aims to capture more than 50% of the incremental growth in its serviceable addressable market over the next four years, which would result in an acceleration in revenue growth.
Management provided an outlook for revenue growth of between 11.5% and 13.6% over the next four years during its recent investor day presentation. At the same time, it expects its operating margin to expand as it scales, reaching the mid-30% range from 30.6% in 2024.
Lam is well-positioned to execute on management's outlook. Not only is growing memory demand a tailwind for its products, but it's also in a position to keep key customers in the space. As a dominant supplier of key equipment, it's afforded much more revenue than smaller competitors to invest in research and development to create the next advancements in chip etching and deposition. That ensures it wins new contracts with manufacturers as they expand operations and refresh old equipment.
Lam Research's stock trades for less than 20 times forward earnings, as of this writing. That's a great value for a stock with the potential to accelerate revenue and expand its margins over the next few years as demand for its products grows. On top of that, management has committed to returning 85% of its growing free cash flow to shareholders through dividends and buybacks. The latter provides a further boost to its future earnings per share, making the current valuation even more attractive.
2. Palo Alto Networks
Palo Alto Networks is a leading provider of cybersecurity software and equipment. The need for cybersecurity has expanded greatly over the last few years as more offices adopt hybrid work environments, migrate their data and operations to the cloud, and increase automation with artificial intelligence.
As enterprise security needs have expanded, Palo Alto has been providing more and more tools and software for them to ensure their data remains protected. Over the last year, management focused on unifying all of its products into a single system with a shared data store, which it calls "platformization." It had 1,150 platformizations as of the end of its most recent quarter, up 35% from a year ago.
Palo Alto's new strategy makes its cybersecurity solutions even stickier than they were before. Additionally, consolidating enterprise security needs into a single data silo gives Palo Alto a significant data advantage to support its machine learning algorithms. That's important for helping it identify and stop threats faster than its competitors can. That ensures it maintains its lead and grows faster than the competition.
The company points to the success of its strategy by pulling out the sales growth of its next-gen solutions. Annual recurring revenue for the segment increased 37% year over year in the most recent quarter, reaching $4.78 billion. On top of that, remaining performance obligations growth accelerated to 21% year over year, indicating a strong and growing pipeline for the business.
Palo Alto Network's stock trades for an enterprise value of about 13 times analysts' expectations for revenue in the current fiscal year. While that's not exactly cheap, it might be worth the price for a company that's capable of growing its top line by roughly 15% per year for the foreseeable future, according to Wall Street.
When you combine that with growing margins from its platformization efforts, the stock could easily climb closer to the median Wall Street estimate over the next year.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lam Research. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
