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The Simple Reason Why Squarespace's Profit Margin Is Better Than Wix's

By Jon Quast, Jason Hall, and Deidre Woollard – Oct 24, 2021 at 8:15AM

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Despite the similarities of the two companies, Wix is already built to support international expansion.

Since Squarespace (SQSP -2.93%) and (WIX -6.69%) provide similar services to their customers, one might assume that their profit margins are comparable. However, Squarespace appears to have a much better gross margin than Wix. Does that mean Squarespace's business is just structured better? Not necessarily.

In this video from Motley Fool Backstage Pass, recorded on Oct. 8, Fool contributor Jason Hall discusses this issue with Millionacres editor Deidre Woollard. Jason points out that Wix has a strong international presence, requiring a bigger workforce. And this may be something that actually weighs on Squarespace's margins if it picks up more business in international markets over time.

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Jason Hall: There's one thing that you noticed earlier, Jon, when we were doing our prep for the show is that the difference in gross margins between the two businesses. It's tough right now because with Squarespace having just gone public recently, we only have a quarter that's publicly reported. Who knows exactly what that looks like. It's also a period where some of Wix's expenses have been a little bit wonky. They've gone up a lot over the past year so you look at their trailing numbers. Their operating margins have come down. But both businesses generate positive operating cash and positive free cash flows. There's interesting things there.

My question, Deidre, I'm going to just pose this to you, it does seem that Squarespace does tend to have higher gross margins. Because where Wix's gross margins are, are about where they've been for the past five years. They're in that 60-ish percentage range. But Wix is also a company that has a lot more feet on the ground. It's a more people-based business. Their president talked about the fact that they don't know exactly what the future is going to look like. But when it comes to them as a hybrid office model or a remote office model, they want their people together as much as physically possible. I think they are really a very people-centered business.

The question is, from an economic model, is Squarespace just built to be more profitable?

Deidre Woollard: I would say yes now. We talked about international expansion. I think if Squarespace wants to be really successful in international expansion, they're going to have to put more boots on the ground in different places. They're going to have to expand that way. It doesn't make sense not to do that. Talking about acquisitions, too, I think they know that in order to really compete as a public company, they're going to have to spend more money than they have in the past.

I think they are trying to get comfortable with that. You've got people who have been with the company for a long time. They have been used to running it lean, they also know that the rules have changed now, they're a quarter into this. I think that that may shift over time.

Jon Quast owns shares of The Motley Fool owns shares of and recommends The Motley Fool has a disclosure policy.

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