What Is a Product Portfolio?
A product portfolio is the collection of all the products or services offered by a company. Product portfolio analysis 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 conducting equity research by investors or analysts supporting internal corporate financial planning.
Understanding Product Portfolios
Product portfolios are an important element of financial analysis because they provide context and granularity to a firm and its primary operations. Investors can distinguish between long-term value stocks and short-term growth opportunities. Portfolio analysis of a firm's product offerings also allows investors to nail down specific drivers of financial performance, which is necessary for effective modeling.
The various components of a portfolio also face different market dynamics and can contribute inconsistently to the bottom line. A firm's market share can vary among the parts of its offering, with more dominant products generally requiring different strategies than high-growth portions of the portfolio. A shifting sales mix can have significant consequences for the bottom line when margins vary across the portfolio.
Companies often re-brand or restructure underperforming and unprofitable products, a strategy that requires portfolio analysis. Products that contribute the most income are generally the most important for short-term financial analysis, and alterations to these flagship elements of the portfolio impact performance more substantially.
Apple, Inc., is known for offering several electronic devices, but the iPhone is the most important driver of top-line and bottom-line results. The smartphone contributed over 62% of total company sales as of June 2018, meaning its performance is more meaningful than that of the laptops, the iPad or the App Store.
- A product portfolio is the menu of goods or services that a firm producer and offers for sale.
- Analysis of product portfolios can give deep and nuanced insight into the workings of a company and its earnings potential.
- Product portfolios will tend to be different for mature versus younger growth companies.
Product Portfolios and Mature Companies
Mature companies often have diversified product portfolios. Internal product development and acquisitions contribute to portfolio size over time, and larger enterprises have the infrastructure to support the marketing of a broader offering. Geographic expansion can also augment a product portfolio, with products varying in popularity among cities or countries.
Diversification tends to limit growth potential while reducing downside risk, so mature firms tend to exhibit less operational volatility. This reduces the amount of speculation in equity valuation. The Proctor & Gamble Company is an example of such a company, with 65 different, well-known personal and household goods brands including Bounty, Crest, and Tide.
Product Portfolios and Growth Companies
Younger firms 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 equity valuation. The various components in a product portfolio often have disparate margins because they have different price dynamics, production costs or marketing demands.