LegalZoom.com, Inc.'s (NASDAQ:LZ) 27% Jump Shows Its Popularity With Investors

Those holding LegalZoom.com, Inc. (NASDAQ:LZ) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.5% in the last twelve months.

Following the firm bounce in price, LegalZoom.com may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 53.9x, since almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

We've discovered 2 warning signs about LegalZoom.com. View them for free.

LegalZoom.com certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for LegalZoom.com

Keen to find out how analysts think LegalZoom.com's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For LegalZoom.com?

There's an inherent assumption that a company should far outperform the market for P/E ratios like LegalZoom.com's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 21% each year during the coming three years according to the nine analysts following the company. With the market only predicted to deliver 10% each year, the company is positioned for a stronger earnings result.

With this information, we can see why LegalZoom.com is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On LegalZoom.com's P/E

LegalZoom.com's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that LegalZoom.com maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware LegalZoom.com is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

You might be able to find a better investment than LegalZoom.com. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.