Mark Zuckerberg and Steven Sinofsky

Facebook’s financial results, revealed yesterday in the company’s IPO filing, showed 2011 profits of $1 billion from sales of more $3.7 billion — translating into a strong 27 percent profit margin. It’s a key ratio to watch because it reflects a company’s efficiency as a business and an investment.

By comparison, Google’s 2011 profit margin was 26 percent, Microsoft’s profit margin was 33 percent in its 2011 fiscal year (ended in June) and Apple’s profit margin was 24 percent for its 2011 fiscal year (ended in September). Amazon.com’s profit margin was a slim 1.3 percent for the year.

Amazon is an outlier in this case, given the traditionally paper-thin margins of the retail business — even though the Seattle company may come under more pressure to boost its margins as it competes with the likes of Apple in the hardware business.

The comparison between Facebook and Google makes more sense, considering that they both make the bulk of their money from online advertising.

Microsoft these days a mixed bag of PC and server software, online services and hardware. But the Windows business, specifically, is renowned for its gigantic profit margins. So even though Facebook and Windows aren’t really comparable as businesses — one makes money from ads, the other from software licensing — it’s an interesting exercise to compare the flagship product of the PC era with the central service of the social networking era.

In other words, if you had $1,000 to invest, would you give it to Facebook CEO Mark Zuckerberg or to Windows President Steven Sinofsky?

For now, at least, Windows still rules on this metric. Operating profit margin in the Windows and Windows Live Division was 65 percent in Microsoft’s 2011 fiscal year, compared with a 47 percent operating profit margin for Facebook.

But particularly given the trends on the Windows side, this should be an interesting comparison to make again in a couple years.

Comments

  • Full 90

    Interesting point about profit margins but it misses the point that valuation is a reflection of expected cash flow.  A significant amount of a high-tech firms valuation is driven by the outlook for growth and therefore future cash flows.  How about completing the rest of the story to layer in Facebook vs. Windows growth prospects.

  • Guest

    Windows is a product that can be dressed up to look like a service. Facebook is a service that can be dressed up to look like a product. Peel back the veneer and buy what’s underneath.

  • Guest

    I don’t know a single investor who would give $1,000 to Microsoft over Facebook right now. There seems to be a little hometown bias in that conclusion.

    • Guest

      I don’t know a single investor who would invest $1,000 in a company that exists because it is trendy to use its only product. Facebook is an extremely risky investment. With Microsoft you at least know your money won’t disappear in 5 years once we’re all broadcasting our thoughts on Majcastr.

      (You probably don’t even know what Majcastr is. That’s OK; it’s pretty stealthy at the moment.)

  • Anonymous

    Predicting the deminse of Windows has been a common drumbeat from Microsoft’s competitors for years, from the “network computer” to “thin clients” to Linux. iOS and Android are the most interesting challenges yet, but 1.2 billion people on the planet use Windows today, and Microsoft is reinventing Windows for nearly every type of device, from mobile to the cloud. I think counting out Microsoft is crazy dumb.

    That said, Windows is a mature business which is hard to grow from near ubiquity. Facebook probably has lots of ways it can monetize its service in the future beyond growing the base, so this comparison feels bit forced. Still interesting.

  • http://twitter.com/SeattleMcCarthy Kevin McCarthy

    Wait until facebook launches a mobile ads product, and a competitior to AdSense….

  • Bob

    Margins alone don’t tell the whole story. The other important aspect is growth. Windows is in decline, FB is still growing strongly.

  • http://twitter.com/jubal_ince Jubal Ince

    Facebook = AOL

  • http://www.facebook.com/people/Bryan-Starbuck/500012914 Bryan Starbuck

    Almost all companies have a big expense on their income statement for “Customer Acquisition Cost” or “Channel Cost”.  Microsoft is rather unique in that these kinds of costs don’t appear on their balance sheet for much of their businesses to acquire customers for their revenue (the OEM channel).  That causes Microsoft’s profit margins to appear very large.

    The benefit of Microsoft is high amounts of income.  Most company’s revenue increases because money has to flow back out in marketing or to channel partners — which is a positive that Microsoft’s revenue is without these costs.

    What makes Facebook impressive is that they have almost as large of profit margins: a) while in growth mode, b) without marketing or channel expenses existing in their business, c) they haven’t yet fully optimized their ability to monetize, and d) they are growing so fast.

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