Over the past six months, LegalZoom’s stock price has fallen to $7.94. Shareholders have lost 7% of their capital, highly disappointing when considering the S&P 500 has climbed 13.4%. This may have investors wondering how to approach the situation.

Is now the time to buy LegalZoom, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even though the stock has become cheaper, we don't have much confidence in LegalZoom. Here are three reasons why LZ doesn't excite us and one stock we'd rather own today.

Why Is LegalZoom Not Exciting?

Founded by famous lawyer Robert Shapiro, LegalZoom (NASDAQ:LZ) offers online legal services and documentation assistance for individuals and businesses.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Regrettably, LegalZoom’s sales grew at a tepid 6.9% compounded annual growth rate over the last three years. This fell short of our benchmark for the consumer internet sector.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

LegalZoom’s management team is currently guiding for flat sales next quarter. Looking further ahead, sell-side analysts expect LegalZoom’s revenue to grow 1.5% over the next 12 months, a deceleration versus its 6.9% annualized growth rate for the last three years. This projection is underwhelming and suggests its products and services will face some demand challenges.

3. Growth in Customer Spending Lags Peers

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like LegalZoom because it measures how much the company earns in transaction fees from each user. ARPU also gives us unique insights into a user’s average order size and LegalZoom’s take rate, or "cut", on each order.

LegalZoom’s ARPU growth has been mediocre over the last two years, averaging 4.4%. This isn’t great, but the increase in subscription units is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if LegalZoom tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace.

Final Judgment

LegalZoom isn’t a terrible business, but it isn’t one of our top picks. Following the recent decline, the stock trades at 9.3x forward EV-to-EBITDA (or $7.94 per share). While this valuation could be reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend taking a look at Microsoft, the most dominant software business in the world.

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