Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
KEYPOINTS
🔑 Uncover hidden growth potential: Analyze a company's business segment performance to identify profitable expansion.
🔑 Profitable diversification is key: Favor companies where new business segments contribute positively to the bottom line.
🔑 Learn from the best and worst: Compare successful expanders like Microsoft and Axon with cautionary tales like Alibaba.
In our quest to build a winning stock portfolio, we're constantly looking for companies with high growth potential and a clear path to profitability.
Today, we'll explore why companies expanding into new business segments with signs of early profitability are particularly attractive investments.
Method to find companies' business segments' profitability
Websites like Marketscreener.com offer valuable insights.
Navigate to the company's "Financials" section, then "Business Segments." Under "Breakdown by Business Segments."
you'll find financial data like Net Income, Gross Profits, or Operating Income for each segment.
What We're Looking For
Look for positive trends in these metrics. Ideally, new segments should be on track for profitability.
Consider historical trends alongside current data. A consistent upward trajectory in new segment profitability is more reassuring than a single positive quarter.
This indicates successful expansion, generating additional revenue streams and strengthening the company's future growth potential.
Good Examples: A Multi-Profitable Powerhouse
Take a look at Microsoft. Their breakdown reveals all segments – Productivity and Business Processes, Intelligent Cloud, and More Personal Computing – are generating positive Operating Income.
This demonstrates a well-managed diversification strategy with each segment contributing to their overall profitability.
Other Success Stories:
Tesla: Beyond its core electric vehicle business, Tesla has ventured into energy storage, solar panels, and autonomous driving technologies. While these segments might not be as mature as the core EV business, they show promise and contribute to Tesla's overall growth narrative.
Axon: Primarily known for its body-worn cameras, Axon has expanded into other public safety technologies like drones and less-lethal weapons. These new segments are demonstrating growth and profitability, contributing to the company's overall success.
Red Flags: Expansion Without Profitability
Now, let's consider Alibaba (BABA). Their Taobao and Tmall group is profitable, but all other segments have been operating at a loss for the past seven years.
This raises concerns about their expansion strategy. While diversification can be a good thing, it requires careful planning and execution. Persistent losses in new segments suggest management hasn't yet figured out how to make them profitable.
Other Cautionary Tales:
Meta (formerly Facebook): The company's aggressive push into the metaverse, housed under the Reality Labs segment, has been marked by significant operating losses. While the metaverse holds immense potential, the current financial performance raises questions about the viability of this expansion.
Why This Matters
Investing in companies with profitable expansion shows a stronger understanding of the market and the ability to replicate success across different business areas. These companies are more likely to achieve sustainable growth while delivering value to shareholders.
The Takeaway
By analyzing a company's business segment breakdown, you can gain valuable insights into their growth strategy. Favor companies where expansion translates into profitability, showcasing a well-managed future with robust revenue streams.
Remember, a winning portfolio considers companies with not just growth potential, but also a clear path to sustainable profitability.
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