The Nasdaq Composite has been in full-on rally mode for a couple of years running now. Several factors have helped propel the tech-centric index higher, including the rebounding economy, advances in artificial intelligence (AI), and recent interest rate cuts courtesy of the Federal Reserve Bank.
After surging 43% in 2023, the Nasdaq has gained roughly 33% so far this year, as of this writing. A look at the past suggests the benchmark index could continue to run in 2025.
It's well known that bull markets tend to last five years on average. The current rally just passed its second anniversary in October, which would indicate there's likely more to come.
And in years that the Nasdaq has gained 30% or more, the following year it has historically climbed 19% higher, on average. This suggests that the coming year could mark a trifecta for investors.
Another factor helping propel the market higher is the fact that stock splits are back in vogue. A growing number of investor-favorite stocks are reaching new heights and splitting their shares. Since this is normally the result of strong operating and financial performance, investors are taking a fresh look at these stock-split stocks.
One such company is Palo Alto Networks(NASDAQ: PANW). The stock has gained roughly 768% over the past decade and 23% over the past year, as of this writing, which prompted a 2-for-1 forward stock split, completed just this month.
Despite its recent gains, there's evidence that Palo Alto's impressive run could continue in 2025. Read on to find out why.
Image source: Getty Images.
A game-changing strategy
Palo Alto Networks has never been afraid to shake up the status quo, something that was front and center over the past year. In an effort to persuade customers to move away from a hodgepodge of security solutions to a unified platform, the company rocked the industry early this year with a move that appears to be a game changer.
Users are often reluctant to bring their cybersecurity solutions under one roof, primarily the result of a variety of contractual obligations with different time periods and end dates. Ending these commitments early often results in a financial penalty from the vendor in question.
To counter this issue, Palo Alto offered current and potential customers services at no cost to get them over that hurdle, thereby encouraging them to consolidate their services onto one of its platforms.
Investors initially balked, but there was a method to the company's madness. Management was well aware that the lifetime value of customers that used two platforms was five times that of those on a single platform. And customers on three platforms had a lifetime value 40 times higher.
By offering free services for just a short time, Palo Alto is able to reap an ongoing windfall that will pay dividends for years to come. Doubtful investors quickly came around to the company's way of thinking.
For its fiscal 2025 first quarter (ended Oct. 31), revenue climbed 14% year over year to $2.1 billion, while its earnings per share (EPS) surged 77% to $0.99. However, the headliner was the annual recurring revenue from the company's next-generation security (NGS) services, which jumped 40% to $4.5 billion. Since future revenue is growing faster than current sales, it shows that customers are taking the company up on its offer.
As icing on the cake, management boosted its full-year forecast, guiding for revenue of $9.15 billion, which would represent growth of 14%. The company is also forecasting adjusted EPS of $6.34, an increase of 11% at the midpoint of its guidance, resulting in the outlook for NGS annual recurring revenue increasing 32% to $5.55 billion.
Wall Street is bullish on Palo Alto
Wall Street rarely agrees on anything, so it's noteworthy when it does -- and most who offer an opinion believe Palo Alto has room to run. Of the 54 analysts who cover the stock, 76% have a buy or strong buy rating, and none recommend selling. An average price target of roughly $204 suggests potential upside of 8% compared to Thursday's closing price.
Just last week, Jefferies analyst Joseph Gallo became the company's biggest cheerleader, maintaining a buy rating and assigning a new Street-high price target of $240. That would be a potential gain for investors of 27% compared to Thursday's closing price. The analyst cited strong fundamentals, further suggesting that cybersecurity stocks will be resilient in the coming year.
One issue that may give investors pause is the stock's lofty valuation. Palo Alto Networks is currently selling for 49 times earnings and 16 times sales, but the most commonly used metrics fail to keep pace with high-growth stocks. However, its price/earnings-to-growth ratio (PEG), which factors in its accelerating growth, comes in at 0.14, when any number less than 1 is the standard for an undervalued stock.
Furthermore, the stock has outpaced the broader market by a wide margin over the past five years, rising 385%, more than four times the 86% gain of the S&P 500.
Given that context, the evidence suggests Palo Alto Networks is a buy.
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