No. of Recommendations: 16
A tech company can start with a close-to-infinite negative net margin and get close-to-100% positive net margin in 25 years.
That's the popular belief of some investors it would seem, but no, of course that can't happen. Those people are mistaking the cycle for a trend, a rookie mistake.
There is no way that any real firm's net margin is ever going to stabilize anywhere near 100%.
Even the best businesses with tiny marginal costs have pesky things like buildings and computers and employees and taxes and exchange fees....
And, these days, maybe a line item for fines.
(I say "real" companies, meaning actual product and/or service firms, because there are some odd beasts out there like closed end royalty funds or whatever)
About the highest I know of among big firms are CME group and Visa, both at around 55% lately, and well out on the tail of the bell curve.
As an aside, it's easy to see why people like toll collector firms.
Any sane investor should realize that if real sales for the S&P 500 rise at (say) 2.5%/year in the next 20 years, or whatever figure near that you might choose, then there is no conceivable reason to assume that aggregate net profits will rise any faster than that.
Especially, as Manlobbi and others pointed out, they are definitely at the high end of the historically observed range these days. For the last ~20 years each dollar of sales has been worth 62% more in net profit for shareholders than it used to be in the prior ~50 years. Maybe that will last and maybe it won't, but historically it's quite the number. From January 1950 up till mid 2004, the absolute peak quarter net margin figure for aggregated non-financial US corporations was 8.48% and the median was 6.11%. So a lasting move down from recent figures around 11% would not be a big shocker.
Random math to illustrate the concern: imagine that net margins gradually fell from today's roughly 11% back to the old normal of 6.1%, and that squiggly fall took place over 50 years. Let's say real sales rise at inflation + 2.5%/year in that time. In that scenario, real net profits would have risen at only 1.26%/year. We have no way of knowing what the future value will be, but we know that a multi-decade norm around 6.1% is possible because it has already happened before. This is emphatically NOT a prediction, jsut an illustration of the implications of what an investor's life would look like if the recent very high net margins are NOT permanent.
Jim
