What do you guys think? Is it alright to combine Profile and Settings in web application? This is quite common approach in mobile apps. Reason to combine these two is to keep the header simple. Not to overwhelm user with too many items.
Use a generic "secondary actions" element, perhaps utilizing a 'user' icon or profile image, to reveal a categorized list of options
As you've mentioned in your comment below the question, large and presumably well-tested platforms like Facebook and Twitter use this approach.
On that point, my personal experience of the Facebook "gear" or "cog" icon, is that revealed dropdown seems overloaded and requires too much searching for what I need.
So just be mindful of that risk. Put careful thought into the order and categorization of your menu, and don't overload it.
These are two distinct categories and merging them can only cause inconvenience/ confusion. If this is the only way to win extra space, then go for it, but keep in mind that this is a compromise, not a solution, not even a workaround.
Produce two prototypes - one with the merged icon and one with two icons and ask respondents to perform tasks such as changing the passwords, changing the display languages, etc. Watch in which case they tend to feel more comfortable.