So this article is conflating the 3 different types of margins [1], and that's at least partially responsible for the results it gets. It talks about operating margins, but the definition that it gives is actually the definition for net margins, net income / revenue. Operating margins uses operating income, which excludes interest, taxes, and capital expenses. There's also gross margins, which are basically the value you add over cost of inputs divided by your revenue, not counting salaries, marketing, customer acquisition, or any of the other stuff you have to do to get from raw materials to products in customers' hands.
The article found that the highest margins are in ports, financial services, toll roads, etc. with certain key (but not all) software, AI, and semiconductors having good margins. But this is a logical consequence of the definition of margin they chose. These are all very capital-intensive businesses: it takes a huge amount of money to build a port, or a fab, or a search engine, or a road, or to start up a bank or insurance company. The financing cost of building these capital improvements, as well as the depreciation on them, is explicitly excluded from the definition of "margin" that the article chose.
Note also that this explains why certain semiconductor and tech companies have high margins but many are very low-margin. If you are TSMC or Intel, you own your own fabs. You spend tens of billions of dollars to construct them, and the financing cost of those investments is explicitly excluded from the definition of "margin" chosen by the article. But if you are a random ASIC manufacturer, you pay TSMC to fabricate your chips, and those payments are included in Cost of Goods Sold and excluded from your gross margin, let alone your operating margin. Likewise, if you are Google, Amazon, or Microsoft, you're making huge capital investments in datacenters. But if you're a random SaaS, your cloud computing costs are included in COGS, they become revenue for the cloud provider, and so your operating margins look much worse.
I'd be much more interested in seeing the analysis re-run with net margins.
Thank you! I was just about to rant about this and decided to scroll to see if anyone had already called this out.
The article is quite embarrassing - it’s ok if you don’t know how P&L statement and balance sheet work, but writing an entire blog post without ever feeling the need to verify basic terminology is either very lazy or very ignorant…
The article found that the highest margins are in ports, financial services, toll roads, etc. with certain key (but not all) software, AI, and semiconductors having good margins. But this is a logical consequence of the definition of margin they chose. These are all very capital-intensive businesses: it takes a huge amount of money to build a port, or a fab, or a search engine, or a road, or to start up a bank or insurance company. The financing cost of building these capital improvements, as well as the depreciation on them, is explicitly excluded from the definition of "margin" that the article chose.
Note also that this explains why certain semiconductor and tech companies have high margins but many are very low-margin. If you are TSMC or Intel, you own your own fabs. You spend tens of billions of dollars to construct them, and the financing cost of those investments is explicitly excluded from the definition of "margin" chosen by the article. But if you are a random ASIC manufacturer, you pay TSMC to fabricate your chips, and those payments are included in Cost of Goods Sold and excluded from your gross margin, let alone your operating margin. Likewise, if you are Google, Amazon, or Microsoft, you're making huge capital investments in datacenters. But if you're a random SaaS, your cloud computing costs are included in COGS, they become revenue for the cloud provider, and so your operating margins look much worse.
I'd be much more interested in seeing the analysis re-run with net margins.
[1] https://www.investopedia.com/ask/answers/102714/whats-differ...