Leveraging AI And The Formation Nation Acquisition Will Improve Efficiency And Customer Value

Key Takeaways

• LegalZoom focuses on reaccelerating subscription growth with high-value customers and leveraging AI for efficient, high-value service delivery to enhance margins and revenue predictability.
  
• Strategic acquisitions and optimized brand spending aim to boost high-value customer acquisition and sustainable revenue growth through enhanced product offerings and partnerships.
  
• LegalZoom's shift to subscriptions and partnership reliance involves execution and integration risks, potentially impacting revenue growth, profitability, and operational efficiency.

Catalysts

Operates an online platform that supports the legal, compliance, and business management needs of small businesses and consumers in the United States.

• LegalZoom is focusing on driving sustainable results by reaccelerating subscription revenue growth, particularly by shifting to higher-value customers and maintaining a strong technology platform, which is expected to improve revenue predictability and increase overall revenue.
  
• The introduction of quality share over sheer market share, focusing on high-intent customers who purchase more expensive initial packages, aims to strengthen LegalZoom's brand and customer lifetime value, enhancing longer-term earnings.
  
• By leveraging AI and its vast proprietary data and network of attorneys, LegalZoom intends to improve service efficiency and deliver high-value solutions, enhancing net margins through increased efficiencies and customer value delivery.
  
• LegalZoom's recent acquisition of Formation Nation is expected to contribute positively to adjusted EBITDA in the first year, enhancing net margins through synergies and expanded product offerings.
  
• The company's new strategy of increasing brand spend without expanding the budget by optimizing its marketing mix, along with partnership models (like the one with 1-800 Accountants), aims to boost high-value customer acquisition, supporting consistent and sustainable revenue growth.

LegalZoom.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LegalZoom.com's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 6.6% in 3 years time.
• Analysts expect earnings to reach $54.2 million (and earnings per share of $0.43) by about March 2028, up from $30.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.7x on those 2028 earnings, down from 55.0x today. This future PE is greater than the current PE for the US Professional Services industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 6.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.57%, as per the Simply Wall St company report.

LegalZoom.com Future Earnings Per Share Growth

Risks

• LegalZoom's strategic focus on quality share over market share might result in fewer client acquisitions, potentially impacting overall revenue growth if high-value customer conversion does not meet expectations.
  
• With the legal environment for beneficial ownership filings remaining volatile, unpredictable changes in compliance requirements could cause fluctuations in transaction volumes, directly affecting revenue from such services.
  
• LegalZoom's pricing strategy, which includes aligning pricing with perceived value, may face challenges if customer demand proves to be price sensitive, impacting revenue and overall profitability.
  
• The transition away from transactional revenue towards a subscription-based model may experience execution risks, which could affect both short-term revenue and long-term sustainability.
  
• LegalZoom's reliance on partnership and M&A efforts, like the Formation Nation acquisition, to bolster growth and diversify offerings carries integration risks and could deter focus from its core subscription services, potentially affecting operational efficiencies and net margins.

Valuation

• The analysts have a consensus price target of $9.857 for LegalZoom.com based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.5, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $822.6 million, earnings will come to $54.2 million, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 6.6%.
• Given the current share price of $9.36, the analyst price target of $9.86 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.