If you’re going to buy individual stocks, you’ll want to do plenty of research before making an investment decision. That’s where the SWOT analysis can come in handy. Here’s how investors can use a SWOT analysis to evaluate a company before buying its stock.
What is a SWOT analysis?
SWOT is an acronym for strengths, weaknesses, opportunities and threats. The SWOT analysis can be used to evaluate a company’s competitive position and may help a company’s leadership team identify a strategic plan.
| SWOT analysis for a stock | |
|---|---|
| Strengths – This might include products that are strong sellers, or more abstract things such as a strong brand or other advantages the company has. | Weaknesses – These are areas that need to be improved and might include product quality issues, a weak balance sheet or poor distribution. |
| Opportunities – These might include opportunities for expansion to a new market (geography or product), or a new technology that could accelerate growth. | Threats – These are things that could harm the company and might include inflation, competition or a change in customer behavior. |
There may be some overlap between the different categories. For example, some developments may represent an opportunity and a threat for the company. Uber CEO Dara Khosrowshahi recently said that the rise of autonomous vehicles presents a potential risk and opportunity for the ride-sharing platform.
SWOT analysis example
Let’s take a look at a SWOT analysis of streaming service giant Netflix.
| SWOT analysis of Netflix | |
|---|---|
| Strengths – Netflix is a leader in streaming content with more than 300 million global subscribers. The company has proven its ability to raise prices over time, aided by its award-winning shows and movies. It has recently ventured into live sports, featuring two NFL games on Christmas Day in 2024 and a boxing match that was the highest streamed sporting event ever. | Weaknesses – It is easy for customers to pause or cancel subscriptions, creating the potential for volatility depending on the content that is available at a given time. Potential high costs for licensed content and live sports can limit profitability. Password sharing by customers can also limit subscribers, but the company has been addressing this issue. |
| Opportunities – Netflix is in the process of building out its advertising business, which is a huge opportunity for the company and could be a significant driver of revenue over the long term. As it looks to add more live sports content, Netflix could continue to disrupt traditional cable businesses and see its subscriber numbers grow further. | Threats – Netflix faces competition from a variety of areas including other streaming services, some of which are owned by major tech companies with greater resources. The company also competes with traditional cable companies as well as social media apps such as Instagram and TikTok. |
Once you’ve finished your analysis, you’ll want to think about each area in more detail and dig deeper on issues you think are particularly important or that you don’t fully understand. When you’re interested in investing in a company, it can be easy to overlook weaknesses and threats because you’re so excited about the potential opportunities, but you need to think critically about the business if you’re going to make a successful investment.
SWOT analysis: Pros and cons
Pros
- Simple to understand
- Typically low cost
- Looks at positive and negatives of the overall business
Cons
- Analysis can be biased by the people conducting it.
- Business is dynamic and the SWOT analysis should be updated regularly.
- SWOT analysis doesn’t identify a strategy for fixing problems.
Bottom line
Using a SWOT analysis can be an effective way to understand a company’s competitive positioning before investing in its stock. Keep in mind that understanding the company’s strengths, weaknesses, opportunities and threats is just one part of the research process. You’ll also want to understand the company’s valuation and future financial outlook before making an investment decision.
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