A SWOT analysis is a tool used by businesses and investors to assess a company’s strengths, weaknesses, opportunities, and threats. Businesses often use the SWOT framework to help make strategic decisions about where to allocate resources and how to respond to changes in the marketplace.
Investors can use a SWOT analysis to decide whether or not to invest in a particular company. This can be helpful because investors look for any way to evaluate stocks and other investments. By conducting a SWOT Analysis on a specific company, it can be one more tool in an investor’s toolkit when choosing what stocks to buy and sell.
What Is a SWOT Analysis?
SWOT is an acronym that stands for Strength, Weakness, Opportunity, and Threats. Analysts who use a SWOT analysis consider these four key aspects of a company to determine its future performance.
Initially, SWOT analyses were used by businesses to assess a firm’s operations. But now, SWOT analyses are used by all sorts of organizations and individuals, including investors.
When using the SWOT framework, investors consider a company’s internal operations and external competition with the expectation that this will provide a well-rounded view of where the stock lies—and where it might be headed.
💡 Recommended: How to Analyze a Stock
Strengths and weaknesses are a company’s elements that give it a relative advantage or disadvantage over its competitors. In this analysis, the strengths and weaknesses usually come from internal factors involving the company’s operations. Opportunities and threats typically come from external factors in the company’s industry or the overall economy.
Many investors probably use some form of a SWOT analysis already, whether they realize it or not. Common sense could compel investors to consider the strengths and weaknesses of a company to some extent.
Using the formal SWOT analysis may give an investor a more systematic, in-depth picture of a company’s present and its potential future.
💡 Recommended: How to Evaluate a Stock Before You Buy
SWOT Analysis Matrix
Business analysts and investors usually depict a SWOT analysis in a table, with quadrants dedicated to each element. Analysts typically create a list of questions for each component that they can answer with quantitative and qualitative data. Strengths and weaknesses are listed first, followed by opportunities and threats.
• What products are performing well?
• What assets does the company have?
• What unique resources and relationships does the company have access to?
• What areas of the company need to improve?
• How much debt does the company have?
• What complaints do customers usually have?
• Could the company offer additional products or enter a new market?
• Is there talent available that the company could hire?
• Could the company leverage new technology to improve operations?
• Do regulations threaten business operations?
• Is the company positioned to withstand an economic downturn?
• Are there any outside security risks?
How to Do a SWOT Analysis
There are several ways to approach a SWOT analysis. Regardless of the method used, analysts should look at a company’s strengths, weaknesses, opportunities, and threats to identify the key factors that will impact an investment.
Strengths may be areas or characteristics where a company excels and has a competitive advantage over its peers. Examples of strength include having a solid brand, conducting innovative research on new technologies or products, or cornering the market for a particular sector in an area (e.g., being the first legal cannabis company in a state that recently legalized cannabis).
Analysis of strength might also come from simply looking at a company’s financial statements. Rising quarterly earnings and dividends, for example, might be considered a strength because it means the company is growing.
If a company doesn’t perform well in critical areas that typically indicate strength, that could show a potential weakness. Declining earnings, cutting or suspending dividends, or a general lack of promising research and development could be signs of weakness. Additionally, analysts may consider inexperienced management or high employee turnover as weaknesses.
Opportunities are potential external factors that a company may be able to take advantage of. For example, suppose a pharmaceutical company specializes in manufacturing a particular type of drug, and that drug is expected to be approved by regulators in another country. In that case, that could be seen as an opportunity to enter a new market. However, it’s important to note that the existence of an opportunity and the reality of a company seizing it are two different things.
Threats are external factors that may harm a company. For a company specializing in oil and petroleum products, the rising trend of electric vehicles (EVs), renewable energy tech, and shifting consumer trends toward sustainable practices could pose a significant threat. This trend may threaten an entire industry, especially with the growth in renewable energy and green investing.
Other examples include a company’s most significant product becoming obsolete (like film and digital cameras did once smartphones became widespread) or a significant competitor encroaching on its business.
How to Use a SWOT Analysis
The best way to use a SWOT analysis will vary depending on the specific situation and goals of the investor conducting the analysis. However, some general tips on how to use a SWOT analysis effectively include:
• Clearly define the purpose of the SWOT analysis.
• Gather as much relevant information as possible. This may involve conducting market research or analyzing data.
• Be honest and objective in your assessment. It is important to avoid bias or personal opinion when conducting a SWOT analysis.
• Periodically review and update the SWOT analysis. As the market environment changes, the SWOT factors will affect the company. Investors want to regularly review and update a SWOT analysis to ensure it remains relevant.
Additionally, investors can gather internal and external data to use the SWOT analysis framework.
💡 Recommended: Using Fundamental Analysis to Choose Stocks
As noted above, strengths and weaknesses refer to a company’s internal operations. These are the resources and experiences readily available to a company. The following are some common internal factors that investors consider when determining a company’s strengths and weaknesses:
• Financial resources: Revenue, earnings, and investments
• Physical resources: facilities and equipment
• Intangible assets: brand name, trademarks, patents, and copyrights
• Human resources
External forces influence and affect every company. They may present opportunities or threats to a company or potential investment. External factors are typically things a company doesn’t directly control, such as the following:
• Market trends: new products and technology advancements
• Economic trends: local, national, and global financial and economic trends
💡 Recommended: Understanding Economic Indicators
Example of a SWOT Analysis
For investors interested in conducting a SWOT analysis, here is an example of one by looking at Netflix.
One of Netflix’s main strengths is its brand recognition — Netflix has become synonymous with online video streaming. The general public sometimes uses “Netflix” to mean all streaming.
Like Netflix, Amazon, Apple, Meta, and Nike all have strong brands as one of their key strengths. These corporations also have the following strengths:
• Amazon: The e-commerce giant has developed an industry-leading logistics and distribution network that ensures quick delivery times to customers
• Apple: The technology company invests substantial resources into the research and development of its products and services.
• Meta: The social media company, formerly known as Facebook, has a diversified portfolio of business units – like Facebook, WhatsApp, and Instagram – that gives it a substantial market share.
• Nike: The apparel company creates strong marketing and advertising campaigns to target more customers.
While Netflix does have many competitors that are threatening its business, the company still has several other strengths because they were the first big player in the streaming space. Additionally, the company produces a lot of exclusive content not available on any other streaming platform.
A potential weakness for Netflix is its high debt levels. The company’s debt rose from shy of $1 billion in 2014 to more than $16 billion in 2020. The company increased its borrowing as it shifted from licensing content to becoming a large television and movie production studio. However, this debt level may constrict future growth, especially in a rising interest rate environment.
One opportunity that Netflix may consider is adding an ad-based model with a lower-priced subscription tier. This opportunity could help the company gain increased revenue from advertisements on its platform while also attracting subscribers interested in signing up for the service at a lower price.
The visible threats to Netflix would likely be their competitors, including Hulu, Amazon Prime, Disney+, and HBO Max. They also have a recognizable, trusted name and plenty of exclusive content not available on other platforms. Disney+, in particular, has gained a large number of subscribers since it was made available.
Additionally, Netflix faces threats from macroeconomic factors, like rising inflation and the tightening of consumer spending. Because of the prevalence of competitors and the increasing cost of a Netflix subscription, consumers may be willing to cancel their subscriptions.
How Can Investors Use SWOT Analysis?
There are several ways that investors can use SWOT analysis. One way is to use it as a tool to screen companies. For example, an investor could use a SWOT analysis to determine companies with a solid competitive position and are well-positioned to take advantage of opportunities in the market.
Investors can also use SWOT analyses to monitor a company’s performance. An investor may conduct periodic SWOT analyses to track a company’s progress in its competitive position and growth prospects.
Even if they don’t know what a SWOT analysis is, investors usually consider at least one of the four areas of strengths, weaknesses, opportunities, and threats when making investment decisions. However, investors can leverage a SWOT analysis to look at all four factors from a systematic, big-picture perspective, providing investment insights that might have been missed otherwise. That is the essence of SWOT analysis.
While SWOT analysis won’t eliminate investment risks, it is one more way for an investor to be as informed as possible before making any financial decision.
The SoFi Invest® investment app offers a variety of options so you can invest in line with your personal risk preferences and financial goals. With SoFi Invest, you can trade stocks and ETFs for as little as $5.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.