Operating Margins

Summary

Operating Margins 3rd of November 2025 Divide a company's income by its revenue, and you get the operating margin. For some volume of sales that comes into the business, it gives an idea of what percentage is left as cash in the end. Barring some accounting shenanigans regarding where the bottom line is. The size of margins is often cited to explain how businesses behave: "Amazon was incentivized to move to cloud hosting and AWS as a higher-margin business than retail, whereas Google could not have been the first mover in hosting because advertising has higher margins." It's a compelling story, though hard to prove definitively as an important part of the company's behavior. Here, let's instead look at some cold hard empirical data about operating margins of real companies. Using everyone's favorite website as the source, we get yearly operating margins of >10,000 public companies alongside business categories and market caps. We look at the last available year, 2025, and cluster by category. To summarize a category, we can straightforwardly take the median margin over all companies in the category. This produces some counterintuitive results, with for example Semiconductors showing a mediocre median margin of 10%. While this is a perfectly meaningful result, it obscures the fact that the category is dominated by a few large outlier companies with very high margins. And of course it's no coincidence that companies with high margins are the largest; those margins are what allowed them to grow in the first place, while their size conversely gives them pricing power and thus higher margins. We therefore also put in an average margin weighted by market cap. Using the weighted average, Semiconductors sits at an exceptional 42%. Here is an interactive plot of median vs weighted average margins for each category, where the size of the dot is the total market cap of companies in the category. The bulk of the companies sit at around a margin of 10%, but there are several clu...