Is LegalZoom Undervalued Amid Rising Momentum and Strategic Growth?

In an era of market volatility and shifting investor priorities, LegalZoom (NASDAQ:LZ) emerges as a compelling case study in value investing. With a current stock price of $10.18 as of November 6, 2025, the company trades at a 12.5% discount to the $11.64 fair value estimate derived from its fundamentals, according to William Blair. This gap, coupled with a 52% total shareholder return (TSR) over the past year, as reported by Yahoo Finance, suggests a stock poised for re-rating. However, the path to unlocking this potential is not without risks, particularly in the rapidly evolving legal-tech landscape.

Financial Performance: Revenue Growth Outpaces Earnings Hurdles

LegalZoom's Q3 2025 results underscore its resilience. Revenue surged 13% year-over-year to $190 million, driven by a 13% increase in subscription revenue and a 14% rise in subscription units to 1.96 million, as detailed in LegalZoom's earnings call transcript. Free cash flow also shone, jumping 114% to $47 million, while adjusted EBITDA margins held steady at 24%, as noted in LegalZoom's earnings call transcript. These metrics reflect a business model that balances scalability with profitability.

Yet, earnings per share (EPS) fell short of expectations, reporting $0.17 against a forecast of $0.19-a 10.53% negative surprise, as noted in LegalZoom's earnings call transcript. This discrepancy highlights a critical tension: while LegalZoom's top-line growth is robust, its ability to translate this into consistent bottom-line results remains a work in progress. For value investors, this duality presents both an opportunity and a caution. The company's strong cash flow generation and margin discipline suggest a durable business, but the EPS volatility demands closer scrutiny.

Valuation and Momentum: A Case for Re-rating

William Blair's recent upgrade of LegalZoom to "Outperform" signals growing confidence in its trajectory. The firm's analysis points to a compelling narrative: a company with a 10% full-year revenue growth outlook, a 24% EBITDA margin, and a cash balance of $237 million, as noted in StockTwits. At $10.18, LegalZoom's price-to-earnings (P/E) ratio is approximately 25x, well below the S&P 500's 28x multiple, while its price-to-EBITDA ratio stands at 10x, significantly cheaper than peers in the legal-tech sector.

The 52% TSR over the past year, as reported by Yahoo Finance, further strengthens the case for undervaluation. This outperformance, driven by revenue growth and strategic share repurchases (1.8 million shares at $9.91 apiece, as reported in LegalZoom's financial results), indicates that the market is beginning to recognize LegalZoom's long-term potential. However, the absence of a clear 2023–2025 TSR figure in the company's investor reports, as reported in LegalZoom's financial results, underscores the need for investors to look beyond headline metrics and focus on the underlying financials.

Risks: AI Competition and Investor Sentiment

The legal-tech sector is not immune to the broader AI-driven market corrections. Palantir Technologies, for instance, recently saw its stock fall 7% despite a "beat and raise" quarter, reflecting investor skepticism toward speculative valuations, as reported in StreetInsider. LegalZoom, while less reliant on AI than Palantir, faces similar risks. Its core offerings-document automation and compliance services-are increasingly challenged by AI-powered alternatives. Yet, LegalZoom's 24% EBITDA margin and diversified revenue streams (65% recurring subscriptions, as noted in LegalZoom's earnings call transcript) provide a buffer against such disruptions.

The broader lesson from Palantir's experience is clear: investors now demand tangible results over hype. LegalZoom's 13% year-over-year revenue growth and 10% full-year guidance, as noted in LegalZoom's earnings call transcript, align with this shift, but the company must continue to innovate to maintain its edge.

Strategic Outlook: A Long-Term Value Play

For value investors, LegalZoom's current valuation offers a margin of safety. At $10.18, the stock is trading below its intrinsic value of $11.64, a discount that appears unjustified given its strong cash flow, margin resilience, and growth trajectory, as noted in William Blair. The company's ability to raise its full-year revenue guidance to $748–$752 million, a 10% increase, as noted in LegalZoom's earnings call transcript, further reinforces its credibility.

However, patience is key. LegalZoom's EPS volatility and the competitive pressures from AI-driven legal-tech startups mean that the re-rating may take time. Investors must weigh the company's long-term potential against short-term earnings fluctuations.

Conclusion

LegalZoom's combination of revenue growth, margin discipline, and a compelling valuation makes it a standout in the legal-tech sector. While risks such as AI competition and EPS volatility persist, the company's strategic strengths-particularly its recurring revenue model and strong cash position-position it as a long-term value play. For investors willing to look beyond short-term noise, LegalZoom offers a rare blend of affordability and growth potential.