Analyst Insights

Citi Downgrades LegalZoom Amid Market Challenges: New CEO Appointed

Citi revises LegalZoom's price target down to $8, citing limited top-line visibility and macroeconomic headwinds

By Harrison Wall

7/10, 08:45 EDT


Stock Rating: Neutral / High Risk
Revised Price Target: $8.00
Previous Price Target: $15.00
Stock Price (Jul 09, 2024): $7.85

Summary Points

  • LegalZoom appoints Jeff Stibel as CEO, shifting focus to subscription-based services amid challenging market conditions.
  • Citi downgrades LegalZoom to Neutral with a revised price target of $8, reflecting limited top-line visibility and macro headwinds.
  • LegalZoom aims to increase subscription revenue to 65.5% of total by 2025, mitigating risks in a declining business formation market.

New CEO and Lowered Guidance Impact LegalZoom Inc (LZ.O) has announced a significant leadership change with the appointment of Jeff Stibel as the new CEO. Stibel, who has been on LegalZoom’s board since 2014 and served as Chairman since 2018, brings a wealth of experience from his previous roles at Dun & Bradstreet and This leadership transition comes amid a challenging macroeconomic environment, which has led to a reduction in LegalZoom’s 2024 revenue guidance. The company is facing headwinds in the business formation market, which is expected to decline by 6% year-over-year in 2024 and an additional 2% in 2025.

Downgraded Rating and Revised Price Target

Citi has downgraded LegalZoom’s stock rating from Buy to Neutral and significantly lowered the price target from $15 to $8. This adjustment reflects the limited visibility into the company’s top-line growth due to macroeconomic challenges and the recent leadership change. The new price target is based on a 10x EV/EBITDA multiple for 2025, down from the previous 19x multiple. The revised valuation takes into account the expected EBITDA of $160.9 million, representing a 22.1% margin. "We lower our target price and multiple given continued limited top-line visibility due in part to macro as well as its announced leadership changes," the Citi analyst noted.

Strategic Focus on Subscriptions and Market Dynamics

LegalZoom’s strategic focus under the new CEO is expected to shift towards building out its subscription business. The company aims to minimize macro risks by increasing the proportion of revenue from subscriptions, which is projected to account for 65.5% of total revenue by 2025, up from 62.5% in 2023. This shift is supported by newer products like LZ Books, LZ Tax, and eSign. The analyst highlighted, "Given CEO Stibel’s experience, we believe his focus is likely to be on building out LegalZoom’s subscription business and to do so in a more specialized/targeted manner."

The broader business formations market is facing significant challenges, with U.S. business applications declining by approximately 8% year-over-year in June and 6% in May. This decline is expected to continue, impacting LegalZoom’s core business. However, the company’s market leadership and strong brand awareness could help it capture a larger share of the online legal services market if the broader market conditions improve.

Valuation and Financial Outlook

Citi’s revised valuation for LegalZoom is based on a 10x EV/EBITDA multiple for 2025, reflecting the challenging macro environment and limited visibility into new formations growth. The company’s EBITDA margin is expected to expand from 18% in 2023 to 22.1% in 2025. Despite the lowered projections, LegalZoom’s focus on product innovation and its category-leading Net Promoter Score (NPS) are seen as positive factors that could accelerate its shift to a subscription-based model.

The risks to this valuation include the potential for higher churn rates among small and medium-sized business (SMB) customers, continued challenges in the broader business formations market, and increased acquisition costs impacting profitability. On the upside, greater traction of LegalZoom’s subscription products could improve overall visibility and financial performance.

"We rate this stock as High Risk due to its recent management change, macro challenges to the broader business formations market, and increased competition that could lead to greater overall volatility," the Citi analyst concluded.