The Many Good Sides of LegalZoom’s IPO

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LegalZoom (NASDAQ:LZ) released pricing details about its upcoming IPO on Monday. According to Barron’s, the legal tech company plans to sell 19.1 million shares at a value of $24 to $27, which could raise over $515 million at the maximum price and would give it a total valuation of over $5 billion. This is a major accomplishment when one considers that it only planned to raise $88 million in a 2012 IPO which was canceled due to a buyout.

LegalZoom is an interesting company with its own niche which should continue to grow given changing trends in the US economy and has a strong financial profile. While there are reasons to worry about whether it is a good buy at its current price, this is an IPO that investors should take a strong look at.

The Changing World of Legal and Business

LegalZoom claims in its S-1/A that its mission is to “democratize law” and make it easier for individuals and small businesses to conduct legal affairs without actually hiring a lawyer. The company provides legal documents such as wills or an LLC form, and then offers compliance services on a subscription basis which help the company stay protected from myriad regulations.

The very idea of democratizing law may sound concerning at first, in the same way that no one would ever consider flying an airplane democratically. LegalZoom is strongly criticized by lawyers and other businessmen who argue that it is no substitute for a lawyer, and that businesses who use it may save a penny now only to risk losing a dollar later. Perhaps the biggest threat this company faces going forward is if states or the federal government decide to crack down on it or impose regulations which will harm its business model.

But there is no reason to think that will happen soon, and there have been political trends against licensing whose advocates argue prevent citizens from making a living without having to pay some expert. That sort of argument is good for LegalZoom, and in the meantime it has continued to gain clients. LegalZoom states that “In 2020, 10% of new limited liability companies, or LLCs, and 5% of new corporations in the United States were formed via LegalZoom.”

Businesses, especially new ones, are going to continue to look for low-cost alternatives to legal services which use technology, and that is exactly what LegalZoom provides.

Finances and Valuations

Like many technological companies, such as ones providing product photography services, LegalZoom did very well thanks to the pandemic. The company reported a revenue of $470 million in 2020, a 15% growth rate compared to 2019. It also grew by 27% in the 2021 1Q compared to the 2020 1Q.

LegalZoom is not a company which promises staggering growth going forward, but by contrast it is a tech company with some history of profitability. LegalZoom reported a net income of $9.9 million in 2020, though it lost $9.8 million in the 2021 1Q. Gross margins also rose slightly to around 67% in 2021.

These financial numbers are good, but a more concerning problem is LegalZoom’s debt level. The company reported owning a shockingly high $731 million in total liabilities, including $512 million in long-term up against just $252 million in total assets. LegalZoom does intend to use the IPO proceeds to pay down the debt, which should make potential investors leery that their money is not being used to fund future growth.

The final question to discuss is the company’s planned valuation of $5 billion. LegalZoom as of March 31, 2021 had $141 million cash on hand. Combine it with its total liabilities and we are looking at an enterprise value of about $5.6 billion. If we assume a 15% growth rate into 2021, LegalZoom’s 2021 revenue will be at around $540 million, which creates an EV/revenue ratio of 10.36.

Drawing a comparison is difficult because there are no similar, public companies to LegalZoom, which is another point in the company’s favor as it shows it has a unique niche. But if we look at a broader trend of other SaaS companies, we can see that a ratio of 10.36 is a little on the high end, but not majorly so.

Final Concerns

LegalZoom is not an IPO without risk, especially as it may face additional regulation as lawyers decry what it offers. But the company has continued to attract customers despite these concerns, has good financial numbers, and has a solid niche with companies offering exactly what it provides. Furthermore, its currently planned valuation is reasonably valued.

Given these factors, this is an IPO which should be highly attractive to investors. While the situation may change depending on how the price adjusts post-IPO, there is plenty in LegalZoom’s favor and investors should try to get in at the IPO if possible and potentially even higher.

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