What is a product portfolio?
A product portfolio is the collection of all the products or services offered by a company. Analysis of the product portfolio can provide nuanced views on a stock type, company growth prospects, profit margin drivers, income contributions, market leadership and operational risk. This is essential for investors researching stocks by investors or analysts supporting the company’s internal financial planning.
Understanding product portfolios
Product portfolios are an important part of financial analysis because they provide context and granularity to a business and its main operations. Investors can distinguish long-term value stocks from short-term growth opportunities. Portfolio analysis of a company’s product offerings also allows investors to determine specific drivers of financial performance, which is necessary for effective modeling.
The different components of a portfolio also face different market dynamics and can contribute inconsistently to net income. The market share of a company can vary according to the parts of its offer, the more dominant products generally requiring different strategies than those of the high growth segments of the portfolio. A variable sales mix can have significant consequences on net income when margins vary from one portfolio to another.
Companies often rename or restructure inefficient and unprofitable products, a strategy that requires portfolio analysis. The products that generate the most income are generally the most important for short-term financial analysis, and the changes made to these key elements of the portfolio have a greater impact on performance.
Apple, Inc., is known to offer several electronic devices, but the iPhone is the main driver of high and low results. The smartphone represented more than 62% of the company’s total sales in June 2020, which means that its performance is more significant than that of laptops, iPad or the App Store.
Key points to remember
- A product portfolio is the menu of products or services that a producer closes and offers for sale.
- Analysis of product portfolios can provide a deep and nuanced overview of how a business operates and its potential benefits.
- Product portfolios will tend to be different for mature growth companies compared to younger growth companies.
Product portfolios and mature companies
Mature companies often have diversified product portfolios. Internal product development and acquisitions contribute to the size of the portfolio over time, and large companies have the infrastructure to support the commercialization of a broader offering. Geographic expansion can also increase a product portfolio, with products varying in popularity between cities or countries.
Diversification tends to limit growth potential while reducing downside risk, so that mature companies tend to display less operational volatility. This reduces the number of speculations on the valuation of stocks. Proctor & Gamble is an example of such a business, with 65 different and well-known brands of personal and household products, including Bounty, Crest and Tide.
Growing product portfolios and companies
Younger companies with small portfolios are more exposed to the performance of their main products, which can lead to greater operational volatility. More risk and higher growth potential lead to more speculative valuation of stocks. The different components of a product portfolio often have disparate margins because they have different price dynamics, production costs or marketing requirements.