Operating margin: why Nvidia keeps 65 cents of each dollar and Ford keeps none

Operating margin answers a simple question: out of every dollar a company takes in, how much is left after paying for everything it takes to run the business — materials, staff, research, marketing, offices — but before interest and tax? It is the best single measure of how much pricing power a business has, and it varies more between industries than almost any other number. Across the companies we cover it runs from 74.59% at Micron to −263.61% at Lucid. This guide explains what drives that range, and why the level matters less than what lies behind it.

Gross, operating and net margin

Three margins describe the journey from revenue to profit:

• Gross margin is revenue minus the direct cost of what was sold, as a share of revenue. It measures how much a customer pays above the cost of making the product.
• Operating margin subtracts the rest of the costs of running the company: research, sales and marketing, administration. It measures the whole business model.
• Net margin subtracts interest and tax and adds anything earned outside the operations. It is the noisiest of the three.

We give operating margin the most weight in our quality factor because it is the hardest to flatter: it is untouched by financing decisions, tax quirks and one-off gains elsewhere. Where a company reports no operating-income line, as Pfizer and Eli Lilly do not, we use earnings before interest and tax instead, and the page says so.

The range, company by company

Operating margin over the twelve months to each company's latest filing:

A dash in the gross margin column means one of two things: the company's filings give no cost-of-sales line our reader can use, or the company is an insurer or a lender, for which we deliberately print none. Gross margin can mislead even when it can be computed: for a health insurer, most costs are medical claims, which a product-cost line leaves out, so the figure would make UnitedHealth look like a far richer business than it is. The rule is set out in the numbers we refuse to print.

What drives the differences

Owning the hard part. Nvidia designs its chips and pays others to manufacture them; demand for its products far exceeds what competitors can supply, so it sets prices. Intel designs and manufactures its own chips and has been investing heavily in factories while losing share — an operating margin of −0.14%. Super Micro assembles servers around other companies' chips, a valuable but competitive job, with a gross margin of just 10.82%. The same industry, three business models, three very different margins. Our semiconductor study goes further.

Selling an idea rather than a product. Coca-Cola's operating margin of 29.34% is almost double PepsiCo's 15.32%. Much of the gap is structural: Coca-Cola largely sells concentrate and brand rights to independent bottlers, while PepsiCo makes and distributes much of its product itself, including a large snacks business that carries the costs of factories and delivery fleets. Neither model is wrong — PepsiCo sells about twice as much — but they produce very different margins. See Coca-Cola vs PepsiCo.

High gross margin, heavy spending below it. Salesforce keeps 77.28% of revenue after the direct cost of its service, but only 19.88% after the cost of selling and developing it. Software companies often look like this while they are still spending heavily to win customers. Palantir and Eli Lilly convert more of a similar gross margin into operating profit, Lilly despite one of the largest research budgets in its industry.

Thin margins at enormous scale. Amazon's 12.08% blends a low-margin retail business with a much more profitable cloud business, and makes up for thin margins with volume. Health insurers work the same way by design: most of each premium dollar is paid back out as medical care.

Manufacturing cars. Tesla at 3.35%, General Motors at 2.32% and Ford at −3.77% show how hard it is to make money building cars, especially while investing in electric vehicles. At the start-up end, Rivian's operating margin was −60.05% and Lucid's −263.61%, and Lucid's gross margin was −96.56%: it spent almost two dollars making and delivering each dollar of cars it sold, before any research or overheads. Our EV and auto study explains why those numbers matter more than the share prices.

Level versus direction

A high margin is not automatically good news, and a low one is not automatically bad:

• Peak margins can be cyclical. Micron's 74.59% comes in a strong phase of a memory-chip cycle that has reversed before, after revenue grew 104.65% a year for three years. The same company lost money in its 2023 fiscal year. In cyclical industries, margins fall as fast as they rise.
• Low margins can be a choice. A company reinvesting heavily in growth keeps margins low on purpose. The question is whether the spending is building something that will earn more later.
• Direction matters most. A margin rising from 10% to 15% usually says more about a business than one stuck at 30%. Our pages show the latest twelve months; the trend is in the company's filings, which how to read a 10-K explains how to find.

Margins and valuation

The market pays more for each dollar of revenue when more of it becomes profit. That is why price-to-sales tracks margin so closely. Palantir traded at 83.86 times sales and Nvidia at 17.6, while General Motors traded at 0.37 times and Ford at 0.26. Coca-Cola, at 8.01 times sales, is valued at more than four times PepsiCo's 1.79. Higher margins explain part of that — Coca-Cola's operating margin is almost double PepsiCo's — and the rest is a richer multiple on its earnings: 28.86 times against 16.26. When a company trades at a high multiple of sales with a low margin, the price is betting that the margin will expand.

Margin tells you how profitable each sale is. It does not tell you how much capital the business needed to make those sales — for that, see return on equity versus return on invested capital.