Subscriptions And AI Tools Will Boost Future Predictability And Customer Retention

Key Takeaways

• Subscription-based services and targeting high-value customers aim to drive sustainable growth and enhance margins through improved predictability and customer retention.
  
• Introducing AI-powered tools seeks operational efficiency and cost reduction, strengthening margins and earnings via improved scalability and service delivery.
  
• A decline in business formations and market share, coupled with challenges from pricing and macro-economic factors, could hinder revenue growth and financial performance.

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 shifting its business model from transactional products to subscription-based services, demonstrating a strategic pivot that could drive sustainable revenue growth and improve predictability. This move is expected to increase revenue and enhance net margins by focusing on higher-margin subscription offerings.
  
• The company is oriented towards attracting high-value customers through increased education and personalized offerings, aiming to improve customer retention rates and reduce churn. This is anticipated to enhance both revenue and net margins as the customer base shifts towards those with longer lifetime value.
  
• LegalZoom is actively testing pricing strategies to better align with the value provided, particularly in compliance-related offerings, which could lead to increased revenue and improved net margins as they adjust to reflect the value of being a premium provider in the industry.
  
• The introduction of AI-powered tools and services, such as document generation and name generators, presents an opportunity for operational efficiency gains and cost reductions, which may positively impact net margins and overall earnings due to improved scalability and service delivery.
  
• The company’s focus on expanding its consumer channel and estate planning services to capitalize on existing brand recognition could diversify revenue streams. Enhanced customer experience and efficiency within this segment are anticipated to support revenue growth and stabilize earnings during fluctuations in business formation trends.

LegalZoom.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LegalZoom.com's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 7.8% in 3 years time.
• Analysts expect earnings to reach $58.0 million (and earnings per share of $0.26) by about December 2027, up from $24.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $32.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.0x on those 2027 earnings, down from 57.7x today. This future PE is greater than the current PE for the US Professional Services industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 8.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

LegalZoom.com Future Earnings Per Share Growth

Risks

• The decline in market share of business formations, amidst testing aimed at narrowing the focus on high-value customers, could limit revenue growth if the company fails to successfully convert these insights into improved customer acquisition strategies.
  
• The continued softness in transaction revenue, impacted by a 7% decline year-over-year largely due to weaker business formations, could pose a risk to overall revenue growth if this trend persists.
  
• The reliance on testing and pricing adjustments, particularly reverting to historical pricing levels, may not yield the anticipated lower churn or increased revenue if price sensitivities are higher than expected, potentially impacting net margins.
  
• The company's single-digit decrease in Average Order Value (AOV) and a mix of lower-priced transactions might lead to challenges in maintaining or growing earnings if not offset by volume or pricing improvements.
  
• Macro-economic challenges, such as a high single-digit decline in census EIN applications year-over-year, could limit the company's growth potential in new business formations, thereby affecting future subscription growth and overall financial performance.

Valuation

• The analysts have a consensus price target of $8.17 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 $9.5, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $742.9 million, earnings will come to $58.0 million, and it would be trading on a PE ratio of 37.0x, assuming you use a discount rate of 6.3%.
• Given the current share price of $8.17, the analyst's price target of $8.17 is 0.0% 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.