LegalZoom’s SWOT analysis: stock faces headwinds amid strategic shift

LegalZoom.com, Inc. (NASDAQ:LZ), a leader in online legal solutions and business formations with a market capitalization of $1.67 billion, finds itself at a critical juncture as it navigates a shifting market landscape and implements strategic changes to drive future growth. The company, known for its strong brand recognition and dominant position in the business formation sector, is facing challenges from increased competition and macroeconomic headwinds while simultaneously working to transform its business model. According to InvestingPro analysis, the stock appears undervalued compared to its Fair Value, suggesting potential upside for investors who believe in the company’s transformation strategy.

Strategic Shift and Acquisition

LegalZoom has recently made significant moves to bolster its market position and adapt to changing customer needs. In early 2025, the company acquired Formation Nation, which includes brands such as Inc Authority and NCH. This acquisition is expected to be accretive to EBITDA and adjusted earnings per share in 2025, potentially generating approximately $60 million in revenue, or about 9% of LegalZoom’s 2024 revenue.

The acquisition brings several strategic benefits to LegalZoom. It provides the company with a scaled outbound sales force of over 140 experts, which is expected to strengthen relationships with small and medium-sized businesses (SMBs). Additionally, the deal offers cross-selling opportunities, with Inc Authority’s LLC formation services complementing LegalZoom’s existing offerings.

Beyond acquisitions, LegalZoom is actively shifting its focus towards subscription-based services and targeting higher-value customers. This strategic pivot aims to provide more stable, recurring revenue streams and improve customer lifetime value. The company is experimenting with new business formation workflows and bundling subscription products based on personalized recommendations to increase upsells and attach rates.

Financial Performance and Market Environment

LegalZoom’s recent financial performance has been mixed, reflecting both the challenges and opportunities in its market. In the fourth quarter of 2024, the company reported preliminary results with revenue of approximately $161.7 million, representing a 2% year-over-year increase and reaching the high end of guidance. EBITDA for the same period was $44.2 million, with a 27.3% margin, slightly above the high end of guidance. The company maintains impressive gross profit margins of 65.5% and has demonstrated strong momentum with a year-to-date return of 20.9%. InvestingPro data reveals that management has been actively buying back shares, signaling confidence in the company’s prospects.

However, the company faces headwinds in its core business formation segment. Analysts project a 5.5% year-over-year decline in LegalZoom’s business formations for the first quarter of 2025, assuming a conservative 3% decline in overall U.S. business formations. This projection is based on data from the U.S. Census Bureau, which reported a 4% year-over-year decline in non-adjusted business applications for January 2025.

The competitive landscape remains intense, with LegalZoom working to maintain its market share. The company’s share of website visits among top business registration sites was 32.2% in January 2025, reflecting a slight increase from the previous quarter but a decrease from the previous year. Competitors such as ZenBusiness and North West Registered Agent have been gaining ground, highlighting the need for LegalZoom to continue innovating and differentiating its offerings.

Regulatory Changes and Market Challenges

A significant challenge for LegalZoom emerged in early 2025 when the Beneficial Ownership Information Report (BOIR) requirement was suspended. This regulatory change is expected to impact the company’s revenue, as it removes a key driver for businesses seeking compliance services. The suspension of the BOIR requirement may lead to decreased demand for LegalZoom’s services and result in challenging year-over-year comparisons throughout 2025.

Despite these challenges, LegalZoom continues to benefit from broader trends supporting entrepreneurship. The ongoing shift towards remote work and the prevalence of side hustles in the post-pandemic economy continue to drive business formation activities, albeit at a potentially slower pace than during the height of the pandemic.

Bear Case

How will the suspension of the BOIR requirement impact LegalZoom’s revenue?

The suspension of the Beneficial Ownership Information Report (BOIR) requirement presents a significant challenge for LegalZoom. This regulatory change is likely to result in decreased demand for the company’s compliance-related services, which have been a key driver of revenue growth. Analysts anticipate that this could lead to softer revenue, particularly in the latter part of 2024 and throughout 2025.

The impact may be twofold: first, there could be a direct reduction in revenue from BOIR-related services; second, the company may face more difficult year-over-year comparisons as it loses the benefit of this regulatory tailwind. This situation underscores the risks associated with relying on regulatory-driven demand and highlights the importance of diversifying revenue streams.

Can LegalZoom maintain its market share amid intense competition?

LegalZoom’s ability to maintain its market share in the face of intense competition is a critical concern. The company has seen a decline in its share of website visits among top business registration sites, dropping from higher levels in the previous year to 32.2% in January 2025. Competitors such as ZenBusiness and North West Registered Agent have been gaining ground, potentially eroding LegalZoom’s dominant position.

The competitive landscape is evolving rapidly, with rivals introducing innovative services such as AI-powered business plan generators. LegalZoom will need to continue investing in product development and marketing to differentiate its offerings and retain its leadership position. The company’s ability to execute its strategic shift towards subscription-based services and effectively leverage its recent acquisition of Formation Nation will be crucial in fending off competition and maintaining market share.

Bull Case

How will the Formation Nation acquisition benefit LegalZoom’s growth?

The acquisition of Formation Nation, including brands like Inc Authority and NCH, presents significant opportunities for LegalZoom’s growth strategy. This strategic move is expected to be accretive to both EBITDA and adjusted earnings per share in 2025, potentially generating around $60 million in additional revenue.

The acquisition brings several key benefits:

1. Expanded market reach: Formation Nation’s brands complement LegalZoom’s existing offerings, potentially allowing the company to capture a larger share of the business formation market.

2. Enhanced sales capabilities: The addition of a scaled outbound sales force with over 140 experts strengthens LegalZoom’s ability to build relationships with small and medium-sized businesses.

3. Cross-selling opportunities: The integration of Inc Authority’s LLC formation services with LegalZoom’s broader legal and compliance offerings creates potential for increased revenue per customer.

4. Operational synergies: The acquisition may lead to cost savings and operational efficiencies as the companies integrate their systems and processes.

If executed effectively, this acquisition could accelerate LegalZoom’s growth, diversify its revenue streams, and strengthen its competitive position in the market.

Can the shift to subscription services drive sustainable long-term growth?

LegalZoom’s strategic pivot towards subscription-based services and focus on higher-value customers has the potential to drive sustainable long-term growth. This shift addresses several key aspects of the company’s business model:

1. Recurring revenue: Subscription services provide more stable and predictable revenue streams, reducing the company’s reliance on one-time transactions.

2. Customer lifetime value: By focusing on higher-value customers and offering ongoing services, LegalZoom can increase the average revenue per user over time.

3. Margin expansion: Subscription services often come with higher margins compared to transactional services, potentially leading to improved profitability.

4. Customer retention: Ongoing subscriptions create stronger relationships with customers, potentially reducing churn and increasing loyalty.

5. Upsell opportunities: The subscription model allows LegalZoom to continually offer additional services and upgrades to existing customers.

Analysts project that LegalZoom aims to accelerate subscription revenue growth in 2025, targeting double-digit growth by year-end. If the company can successfully execute this strategy, it could lead to more sustainable and profitable growth in the long term, despite near-term challenges in the business formation market.

SWOT Analysis

Strengths:

• Strong brand recognition and market leadership in online legal solutions
• Strategic position as the first service used by approximately one-third of business formation customers
• Recent acquisition of Formation Nation enhancing capabilities and market reach
• Progress in transitioning to a subscription-based model

Weaknesses:

• Declining website traffic and market share among top business registration websites
• Transition to subscription model and focus on high-value customers still in early stages
• Dependence on business formation market, which is subject to macroeconomic fluctuations

Opportunities:

• Expansion of subscription services to drive recurring revenue and increase customer lifetime value
• Cross-selling potential through the Formation Nation acquisition
• Growing trend of remote work and side hustles supporting ongoing demand for business formation services
• Potential for AI-enhanced services to improve offerings and operational efficiency

Threats:

• Intense competition from both established players and innovative startups in the legal tech space
• Regulatory changes, such as the suspension of the BOIR requirement, impacting demand for compliance services
• Macroeconomic headwinds potentially slowing the pace of new business formations
• Rapid technological advancements requiring continuous innovation to remain competitive

Analyst Targets

1. Barclays (LON:BARC) - Equal Weight, $9.00 price target (February 27, 2025)

2. Barclays - Equal Weight, $8.00 price target (February 11, 2025)

3. Citizens Bank - Market Perform, no price target (July 25, 2025)

Analysts maintain a cautious outlook on LegalZoom, with ratings ranging from Market Perform to Equal Weight. The most recent price targets from Barclays suggest a modest upside potential, reflecting the balanced view of the company’s prospects amid ongoing strategic changes and market challenges.

In conclusion, LegalZoom finds itself at a pivotal moment as it navigates a competitive landscape and implements significant strategic shifts. While the company faces challenges from regulatory changes and intense competition, its strong brand, market leadership, and strategic initiatives provide a foundation for potential growth. The success of its subscription model transition and the integration of recent acquisitions will be critical factors in determining LegalZoom’s future performance in the evolving legal tech market. With net income expected to grow this year and the stock trading below InvestingPro’s Fair Value estimate, investors may find an attractive entry point. For deeper insights into LegalZoom’s valuation and growth prospects, including access to 15+ additional ProTips and comprehensive financial metrics, explore the full analysis available on InvestingPro.

This analysis is based on information available up to July 28, 2025, and does not include any subsequent developments or market changes.

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