A Close Analysis Of The LegalZoom Stock, Performance And Competitive Landscape

A Close Analysis Of The LegalZoom Stock, Performance And Competitive Landscape
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LegalZoom. com Inc (NASDAQ:LZ) is a company to watch, according to current Nasdaq stock exchange figures, with an enterprise value of 35.87 billion dollars. With an increasing number of people beginning their own businesses and many owners lacking interest in or knowledge of legal and compliance processes and frameworks, the future of the industry appears to be bright.

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InvestGrizzlyRock Value Partners was up 34.54% net for 2021. The fund marked 10 years since its inception with a 198% net return, resulting in an annual return of 11.5%. GrizzlyRock enjoyed 14.8% long alpha against the S&P 500 and 26.9% against the Russell 2000. Q4 2021 hedge fund letters, conferences and more The fund's short Read More

Get To Know The Company

LegalZoom is a leading online platform for legal and compliance solutions in the United States, with the goal of democratizing the law. LegalZoom has more than 20 years of experience navigating complex regulations and simplifying the legal and compliance process for its customers throughout all 50 states and over 3,000 counties in the United States. The company specializes in business formation, corporate modifications, filings, business compliance, trademarks, patents, copyright, taxes, licenses, permits, agreements, and other services.

LegalZoom assists its customers in forming and protecting their businesses, ideas, and families, and is driven by the basic concept that every business deserves the complete protection of the legal system and a simple means to keep compliant with it. What experts say about Legalzoom is that by 2022 they will have formed 10% of all new LLCs and 5% of all new corporations in the United States. This is astronomical - and yes, it allows small business owners to focus on their core competencies rather than the legal and regulatory complexities that come with running a business. In addition to business formations, LegalZoom provides continuing compliance and tax assistance, trademark and copyright filings, and estate planning documents to protect small businesses and their founders.

“Our mission of Democratizing Law has been a constant from day one. Our goal is to level the playing field for small businesses by making the law accessible with simple and affordable services. At business formation, small businesses are looking for a lot more than just legal help. We’re excited to help remove roadblocks that get in their way, legal or otherwise,” Wernikoff said in a statement on the release day of LegalZoom on the stock market.

Thoughts On Valuation & IPO

The company's management and underwriters sought to sell 19.1 million shares at a price range of $24 to $27 per share, with the ultimate price set at $28, well above the higher end of the range. With the offering, the company expects to raise $535 million in gross proceeds. Net cash after the offering is estimated to be roughly $230 million based on the offer proceeds.

The 194.1 million shares are worth $5.4 billion in equity, which translates to a $5.2 billion operational asset valuation. When we look at the underlying firm, we notice a sizable revenue base, as well as profitability. The company generated $408 million in revenue in 2019, with a $46 million operating profit after a $14 million impairment change. Revenues increased by 15% to $470 million and change in 2020, while operating profits increased slightly to $49 million, however they were really down if we compensate for the impairment charge incurred in 2019.

Revenues during the first quarter of 2021 increased by 27% to $134.8 million, resulting in a $540 million sales run rate. This works out to approximately 10 times sales with a $5.2 billion operational asset valuation.

With shares trading as high as nearly $40 in the first few days of trading, the company's value has increased by $2.3 billion, resulting in a $7.5 billion operational asset valuation. This means that, of course, expectations have risen to 14 times annualized sales and even lower earnings multiples.

Final Thoughts

Although LegalZoom is well positioned to be a long-term secular growth story, current valuations appear to already reflect this. Other concerns, aside from the valuation risks in terms of the sales multiple, are much more generic. This includes, among other things, a competitive operating environment, the perceived value of client counsel, and reputation (in the event that some incorrect advice is given). Fortunately, there are a number of traditional incumbents in the competitive area, and it appears that the company is well positioned to capture market share from them, making it an interesting enough tale to keep an eye on.

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Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at [email protected]
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