LegalZoom (LZ): Is the Recent Valuation Expansion Justified by 2025 Growth Catalysts?

LegalZoom (NASDAQ: LZ) has emerged as a standout in the small-cap legal tech sector, with its market capitalization surging to $1.934 billion as of August 2025. This valuation expansion, however, raises a critical question: Is the company's current price-to-earnings (P/E) ratio of 71.53 and enterprise value-to-EBITDA (EV/EBITDA) multiple of 40.81 justified by its 2025 growth trajectory? To answer this, we must dissect LegalZoom's strategic pivot to recurring revenue, its AI-driven innovation, and its margin resilience in a macro-sensitive environment.

Recurring Revenue: The Engine of Sustainable Growth

LegalZoom's transformation from a transactional model to a subscription-based business has been a cornerstone of its 2025 success. In Q2 2025, subscription revenue hit $119.9 million, a 10% year-over-year increase, accounting for 62% of total revenue. This shift has unlocked predictable cash flows and higher customer lifetime value. The company's “Do It For Me” (DIFM) suite, which combines AI automation with human legal expertise, has driven a 22% growth in subscription units to 2 million, underscoring strong demand for scalable legal solutions.

The acquisition of Formation Nation in February 2025 further solidified LegalZoom's recurring revenue model. By integrating compliance and business formation services, the company now offers a “white-glove” experience for small businesses, enhancing retention and cross-selling opportunities. This diversification has translated into a 20% adjusted EBITDA margin in Q2 2025, up from 16% in 2024, despite a net loss of $0.3 million.

Strategic AI Partnerships: Redefining Legal Accessibility

LegalZoom's 2025 AI partnerships with Perplexity and OpenAI represent a paradigm shift in how legal services are accessed. The collaboration with Perplexity, the first of its kind between a legal services provider and a generative AI platform, embeds LegalZoom's offerings directly into Perplexity Pro's AI-powered search engine. This integration allows users to access discounted legal services—ranging from document templates to compliance support—while seeking real-time answers to legal questions.

Similarly, LegalZoom's integration with OpenAI's ChatGPT enables AI agents to deliver tailored legal guidance, including business formation options and editable documents. These partnerships not only expand LegalZoom's reach but also align with a broader consumer trend of relying on AI for immediate, affordable solutions. As CEO Jeff Stibel noted, “AI is not optional—it's a core component of LegalZoom's long-term strategy.”

The financial impact of these initiatives is evident. LegalZoom's free cash flow surged 82% year-over-year to $31.6 million in Q2 2025, while its cash reserves grew to $217.0 million. These metrics highlight the company's ability to monetize AI-driven efficiency while maintaining profitability.

Margin Expansion and Macro Resilience

Despite operating in a macro-sensitive small-cap space, LegalZoom has demonstrated remarkable margin resilience. Its 20% EBITDA margin in Q2 2025, coupled with a 35% year-over-year increase in adjusted EBITDA, reflects disciplined cost management and pricing power. The company's variable cost structure—rooted in its subscription model—allows it to scale efficiently even in a fragmented legal market where only 4% of services are currently digitized.

LegalZoom's balance sheet further insulates it from macroeconomic risks. With $217.0 million in cash and a $100 million share repurchase authorization, the company has returned $20.4 million to shareholders in Q2 2025 alone. These actions, combined with its upgraded 2025 revenue growth outlook (8% vs. 5%) and maintained 23% EBITDA margin guidance, signal confidence in navigating potential downturns.

Valuation Justification: Growth vs. Risk

LegalZoom's current P/E ratio of 71.53 and EV/EBITDA of 40.81 are steep by traditional standards but align with its growth profile. The stock's valuation reflects investor optimism about its AI-driven disruption of a $51 billion legal services market. However, risks remain: macroeconomic headwinds could dampen small business formations, and regulatory scrutiny of AI tools may emerge.

For investors, the key question is whether LegalZoom can sustain its 8% revenue growth and 23% EBITDA margin while scaling AI integration. The company's first-mover advantage in AI partnerships, robust cash flow generation, and strategic acquisitions (e.g., Formation Nation) suggest it is well-positioned to do so.

Investment Thesis

LegalZoom's valuation expansion is justified by its recurring revenue transformation, AI-led innovation, and margin expansion. While the stock carries growth stock characteristics (high P/E, macro sensitivity), its financial discipline, regulatory agility, and market leadership in digital legal services provide a compelling risk-reward profile. Investors with a 3–5 year horizon may find value in LegalZoom's ability to democratize legal access while capturing a larger share of the digitizing legal market.

Final Verdict: For those comfortable with small-cap volatility, LegalZoom's 2025 catalysts—recurring revenue, AI partnerships, and margin resilience—justify its premium valuation. However, prudence is advised given the high P/E ratio and macroeconomic uncertainties. A core holding for growth-oriented portfolios, but a cautious bet for conservative investors.