LegalZoom.com (NASDAQ:LZ) makes legal documents accessible to the greater public without needing to get a lawyer on retainer. This technology-based approach to traditional legal services helped the company grow over the past 20 years and ultimately to IPO. But investor reaction to the company has been tepid since its public debut in June 2021.
With shares trading more than 50% lower since the public markets debut, is LZ a buy?
It’s not the first time the company tried going public – it previously withdrew a 2012 offering. Since then, U.S. legal system has become even more complicated and expensive to navigate. The average person or small business can’t typically afford competent legal counsel for any extended time period.
Attorney fees cost an average of $225 per hour, and their hourly rates can run into the thousands of dollars. Services like LegalZoom are necessary, especially for small businesses and solopreneurs who can face difficult legal battles.
How LegalZoom Got Started
LegalZoom is a Glendale, California-based legal technology company founded in March 2001. The platform offers a variety of legal documents, such as wills and trusts.
It also assists with business formation filings, copyright and trademark applications, and even offers referrals to attorneys or other professional services, like accountants to assist with tax services.
For years, it was recognized as an innovative startup that creates value for its customer base. By the time it filed for its IPO, the company reported 378,000 business formations for 2020. That’s nearly a 30 percent increase from the prior year and brought the total to over 2.8 million businesses formed since the company’s inception.
This number is important because small businesses are a large part of LegalZoom’s revenue model. These businesses are often too small to hire in-house counsel, but they’re still held to the same regulatory requirements of their corporate counterparts.
Thus, LegalZoom focuses heavily on marketing transactions to small businesses and upselling them on subscriptions to protect their businesses from potential legal threats.
LegalZoom Business Model
LegalZoom has three key revenue streams:
- Transactions,
- Subscriptions, and
- Partner Fees.
Transactions are a la carte services bought for a one-time flat fee. Customers can also subscribe monthly to gain access to recurring services and even benefit from the assistance of a live attorney. Finally, partners pay the company for customer referrals from its site.
The company generated a total of $470.6 million in revenue during the year leading up to its 2021 IPO. Transactions and Subscriptions made up the bulk of this revenue, accounting for $212.1 million and $229.8 million, respectively. Both experienced double-digit growth from the prior year.
Although it did lose partner fee revenue, this was due to a conscious decision by leadership to end certain partnerships that no longer aligned with the company’s roadmap. Through partners and acquisitions, LegalZoom is expanding services to feature payroll, accounting, and even web hosting.
CEO Dan Wernikoff expects the company’s aggressive ecosystem buildout will make it an indispensable part of every small business. He has a long-term vision of leveraging firm expertise in legal and compliance to grow revenues, and so far it’s been paying off.
Monitoring LegalZoom’s Financials
LegalZoom revenue growth has been sustained through 2021, reporting $147.9 million in its most recent quarterly report.
That’s a 12 percent year-over-year boost, driven largely by a 24 percent increase in subscription revenue. This helped the company drive up gross margin from the same period in the prior year, although it did experience a $39.7 million net loss for the quarter.
Cash flow declined heading into year end due to investment in expansion opportunities. It most recently acquired Earth Class Mail, a virtual mailbox solution for businesses that flourished during the pandemic’s shift to remote work.
This purchase took a chunk out of the $310.7 million in cash the company held at the start of the fourth quarter. Thankfully, the company already paid off its $521.6 million 2018 term loan. This came out of the $666.9 million net it raised from the July IPO, which gives the company a lengthy runway to continue growing the business.
LegalZoom ended 2021 with revenue estimated at around $575 million, based on $142 million in the fourth quarter. Still, LegalZoom faces several obstacles on its path to financial success.
Why Is LegalZoom Stock Dropping?
Although it has somewhat of a moat LegalZoom does have stiff competition. Services like Rocket Lawyer, Nolo, BetterLegal, and LegalShield directly compete in the legal services arena. In addition, several services like Incfile, ZenBusiness, and CorpNet specifically focus on providing outsourced services to small businesses. Increased competition and economic challenges has led to a quarterly earnings loss that has pummeled LZ share price.
Business formations are a key growth segment for LegalZoom, and this heated competition will keep it from reaching its full growth potential. And there are potential economic factors that could stifle progress even further if fewer businesses are started over the next decade.
LegalZoom needs to further diversify its revenue sources if it wants to scale at a rate that gets investors salivating. While it’s making moves to do that, it’s too early to tell if they will pay off in the long run.
The Final Verdict on LegalZoom
LegalZoom offers a variety of legal and other professional services to its growing client base. Although small businesses face the same regulatory hurdles as corporations, they don’t have access to in-house counsel. This keeps LegalZoom in business, and it’s a booming business albeit with fierce competition.
If the company can further diversify its revenue streams to offer expansive small business services via partnerships, it could sustain growth and make a healthy profit. However, it doesn’t have the growth prospects of other technology plays that focus on the broader metaverse.
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