The S&P 500 is in the throes of a bull market that's been running riot for more than two years now. The rally is currently taking a breather, but most experts believe there's still upside ahead. One of the biggest contributors to Wall Street's bullish sentiment has been the advent of artificial intelligence (AI).
Advances in AI are causing a paradigm shift across a variety of industries, which has been a key driver of the market rally. After gaining 24% in 2023, the benchmark index tacked on gains of 23% in 2024. Market history suggests the S&P will likely continue to add to its tally in 2025.
Going back 50 years, the S&P 500 has generated positive returns 78% of the time. Furthermore, in years following back-to-back gains of 20% or more, the S&P has risen 12%, on average, suggesting the rally still has room to run.
There's also been a renaissance in the popularity of stock splits, which has investors taking a fresh look at companies that have split their shares. This action is historically the result of strong operational and financial results, which have fueled robust stock price gains. This, combined with AI, represents a compelling opportunity for investors to profit from these tailwinds.
Let's look at two stock-split stocks with ties to the AI boom that investors should have on their watchlist.
Image source: Getty Images.
1. Palo Alto Networks
One company investors should consider is Palo Alto Networks(NASDAQ: PANW). The stock delivered gains of 23% in 2024 and is up 715% over the past 10 years (as of this writing). This stellar long-term track record encouraged management to declare a 2-for-1 forward stock split that was completed last month. Despite the company's impressive performance in recent years, the secular tailwinds fueling its growth continue to gain traction.
One of the biggest challenges facing companies today is the ongoing threat of hacks, data breaches, and unauthorized intrusions into critical business systems, and the perpetrators are only becoming more sophisticated. Palo Alto Networks has made its fortunes as a clear innovator in the field of cybersecurity. Last year, the company provided keen insight into its long-term vision, incentivizing customers to take their defenses up a notch.
A chain is only as strong as its weakest link, and any cybersecurity system is vulnerable to the hodgepodge of vendors used to cobble together a system, often leaving gaping holes for hackers to exploit. Palo Alto recently consolidated its individual modules into a unified platform underpinned by artificial intelligence.
Its proprietary Precision AI system uses AI and machine learning to aggregate and sift through the data to identify and mitigate potential threats. Furthermore, these systems tend to learn and improve over time. So, the more customers Palo Alto adds, the more data it accumulates, and the more formidable its system becomes.
To encourage customers to make the move to one of its three platforms, Palo Alto offered free services to bridge the gap as users migrate from multiple vendors with a variety of contractual end dates.
This strategy wasn't without risk, but there are early signs of success. Palo Alto has been "signing larger transactions" thanks to its platform offerings, which "deliver better security outcomes." Management also notes that customers have a "significant incentive" to adopt the company's full suite of services: cloud security, security operations, and network security.
For its fiscal 2025 first quarter (ended Oct. 31), the company generated revenue of $2.1 billion, up 14% year over year, while earnings per share (EPS) of $0.99 soared 77%. Additionally, annual recurring revenue from the company's next-generation security services grew to $4.5 billion, up 40%. This highlights the success of management's strategy shift.
The most commonly used valuation metrics are often inadequate when evaluating high-growth stocks, and Palo Alto Networks is no different. The stock is currently selling for 47 times earnings and 15 times sales (as of this writing), which is enough to make value investors run for cover. However, using the more appropriate price/earnings-to-growth (PEG) ratio, which takes into account its accelerating growth, it sports a multiple of 0.14 (any number less than 1 is the benchmark for an undervalued stock).
That's why Palo Alto Networks is a buy.
2. Arista Networks
Another long-term winner investors should keep on their shortlist is Arista Networks(NYSE: ANET). The stock gained 88% in 2024 and is up 2,700% over the past 10 years (as of this writing). These gains prompted management to initiate a 4-for-1 stock split, which it completed in December. Despite its impressive gains, the dawn of generative AI in early 2023 has acted as a springboard for Arista, and there could be much more to come.
Arista Networks rose to prominence by creating revolutionary network switches that link servers and other high-speed devices on a network with low latency (very little lag time). The company has expanded its suite of products to include many of the switches, routers, and other networking hardware necessary to expedite the flow of data between data centers, servers, and networks.
Arista's most recent Ethernet offerings were developed for the high-speed data transfer needed to accommodate the massive large language models that underpin AI. Furthermore, most AI processing takes place in data centers, which are rapidly updating their capabilities to withstand the rigors of AI. The accelerating upgrade cycle, courtesy of AI, represents a compelling opportunity for Arista Networks.
In the third quarter, Arista generated revenue that grew 20% year over year and 7% sequentially to $1.8 billion. This resulted in EPS climbing 35% to $2.33. The results sailed past both management's forecast and Wall Street's consensus estimates.
One drawback is the stock's seemingly frothy valuation. Arista Networks is currently selling for 53 times earnings, which might be off-putting to some investors. However, its forward PEG ratio comes in at 0.9, suggesting it's not as expensive as it might appear at first glance.
The company's key place in the AI ecosystem, its long track record of success, and its reasonable valuation illustrate why Arista Networks is a buy.
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Danny Vena has positions in Arista Networks. The Motley Fool has positions in and recommends Arista Networks. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
