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Where a lot of new traders seem to get it wrong is understanding what a company’s profit is truly made up of. What percentage of the profits does a company rely on certain products or division of its business?
We see these type examples among many big-name stocks, including that of Microsoft (MSFT). Obviously Microsoft in itself is not a product, but rather it has many different products underneath the name. Other examples include phone makers and soft-drink companies. Pepsico (PEP) doesn’t just rely on Pepsi for their profit.
The idea I am trying to drive home is that you must understand how much a certain product’s success or failure really means to the company as a whole. The chart of Microsoft’s operating profit breakdown does a good job of showcasing this very problem…
source – http://www.businessinsider.com/chart-of-the-day-microsoft-operating-income-by-division-2010-2
Last year Microsoft’s gaming platform Xbox had a 1 billion dollar write off for its defective consoles, yet the news didn’t even bother the stock and company all together because it is such a little part of where their profit comes from.
Before you base your decision to buy or sell a stock on the release or struggle of a certain product make sure to really understand what this actually means to the company.