Is LegalZoom (LZ) a Buy Following Its Bullish Outlook and Strategic AI-Driven Transformation?

LegalZoom (LZ) has emerged as a compelling case study in the intersection of legal innovation and AI-driven business transformation. With a 9% year-over-year revenue increase in Q2 2025, a raised full-year growth target to 8%, and strategic AI partnerships with OpenAI and Perplexity, the company is redefining accessibility in legal services. But does this momentum translate into a sustainable investment opportunity? Let's dissect the catalysts behind LegalZoom's outperformance and assess its long-term value proposition.

Financial Outperformance: A Subscription-Driven Engine

LegalZoom's Q2 2025 results underscore a strategic pivot toward recurring revenue. Subscription revenue surged 10% to $119.9 million, accounting for 62% of total revenue, while transaction revenue grew 6% to $72.6 million. The subscription segment's 22% unit growth (reaching 2 million units) highlights the company's ability to scale its customer base, even as average revenue per user (ARPU) dipped 6% to $256. This trade-off—prioritizing volume over price—aligns with the subscription economy's playbook, where customer retention and lifetime value outweigh short-term ARPU fluctuations.

Profitability metrics further validate this strategy. Adjusted EBITDA expanded to $39 million (20% margin), a 400-basis-point improvement year-over-year, while free cash flow jumped 82% to $31.6 million. These gains reflect cost discipline, particularly in sales and marketing, which dropped from 40% to 29% of revenue. LegalZoom's ability to scale efficiently in a fragmented market—where only 4% of U.S. legal services are delivered online—positions it to capture a larger share of the $51 billion serviceable addressable market (SAM).

AI Partnerships: The Next Frontier of Legal Accessibility

LegalZoom's partnerships with OpenAI and Perplexity are not mere PR stunts—they represent a calculated effort to embed AI into its core operations. The integration of LegalZoom's legal resources into OpenAI's ChatGPT platform enables users to access tailored legal advice and document drafting, democratizing access to expertise. Meanwhile, the collaboration with Perplexity targets AI-savvy professionals, offering a legal support program for Perplexity Pro users. These initiatives align with CEO Jeff Stibel's assertion that “AI is not optional at LegalZoom,” emphasizing its role in supplementing—not replacing—human legal professionals.

The financial implications are tangible. LegalZoom's “Do It For Me” (DIFM) products, which blend AI and human intelligence, are already driving higher customer retention and attracting premium clients. For instance, DIFM services for small businesses, which require complex legal guidance, could command higher margins while reducing service delivery costs. The company's 35% adjusted EBITDA growth in Q2 2025 and 82% free cash flow increase suggest that AI is not just a cost-cutting tool but a revenue accelerator.

Market Positioning: Capitalizing on Industry Inefficiencies

LegalZoom's 9% market share in its SAM is modest but strategic. The legal services industry remains highly fragmented, with 35% of solo practitioners lacking a website and a staggering -61 Net Promoter Score for traditional attorneys. LegalZoom's tech-driven model addresses these pain points by offering a user-friendly, scalable alternative. Its AI-powered tools—such as automated document generation and compliance tracking—reduce friction for small businesses and individuals, who often lack the resources to navigate traditional legal systems.

Moreover, LegalZoom's focus on AI-driven personalization (e.g., Perplexity's search-integrated legal support) taps into a broader trend of AI-led customer engagement. As AI adoption accelerates across industries, LegalZoom's early-mover advantage in legal tech could solidify its leadership. The company's raised 2025 revenue guidance to 8% growth, coupled with a 23% adjusted EBITDA margin target, signals confidence in its ability to monetize these innovations.

Investment Thesis: Buy or Wait?

LegalZoom's financial and strategic momentum makes it a compelling buy for investors seeking exposure to the AI-driven legal services sector. Key catalysts include:
1. Subscription Scalability: The 22% unit growth in Q2 2025 demonstrates LegalZoom's ability to attract and retain customers, even as ARPU declines. This bodes well for long-term cash flow generation.
2. AI-Driven Efficiency: Partnerships with OpenAI and Perplexity are enhancing both customer experience and operational margins, creating a flywheel effect.
3. Market Tailwinds: The $51 billion SAM, coupled with low online adoption rates, offers ample room for growth.

However, risks persist. The legal tech space is competitive, with startups and traditional firms increasingly adopting AI. LegalZoom must execute its AI roadmap without compromising service quality. Additionally, regulatory scrutiny of AI tools could introduce friction.

For now, LegalZoom's strong cash flow, disciplined cost structure, and AI-first strategy justify a bullish outlook. Investors should monitor its ability to maintain subscription growth and expand margins while scaling AI integrations. With a current market cap of ~$2.5 billion and a forward P/E of ~12x, LegalZoom appears undervalued relative to its growth trajectory.

Final Verdict: Buy for the long term. LegalZoom's AI-driven transformation is not just a buzzword—it's a blueprint for capturing a significant share of the digital legal services revolution.