Why LegalZoom Stock Crashed Today


The cheaper LegalZoom stock gets, the more it looks like a buy.

LegalZoom.com (LZ -22.30%) stock collapsed in early trading Wednesday, on reports of what some deemed a boardroom coup that sparked a series of downgrades from Wall Street analysts.

As of 10:15 a.m. ET, shares of the online corporate documentation specialist were down 30.3%.

LegalZoom stock is down. What’s up with that?

In a press release on Tuesday, LegalZoom announced the immediate departure of current Chief Executive Officer Dan Wernikoff, who will be replaced in the CEO role by current Chairman of the Biard Jeffrey Stibel. No explanation was given in the press release for the executive switcheroo though the company said in an SEC filing that “Wernikoff’s departure is not a result of a disagreement with the Company on any matter relating to the Company’s operations, policies or practices.” The press release noted that “The Board and Mr. Wernikoff decided that now is the right time for this transition, as the Company increases its focus on shifting towards subscription-based revenue to drive long-term profitable growth.”

Investors couldn’t help but think that Wernikoff’s removal may also be related to the company’s disappointing financial performance in Q1, after LegalZoom reported (in May) that revenue grew only 5% year over year, and warned that full-year revenue may miss analyst targets.

Is LegalZoom stock a buy now?

I think a deteriorating financial picture may have the most to do with LegalZoom’s decision to change up its leadership structure. Although management stated in its press release that its Q2 guidance is unchanged, with revenue expected to range from $172 million to $176 million, LegalZoom significantly reduced guidance for the full year. The new guidance range of $675 million to $685 million implies that sales growth this year could be as little as 3% — and after a 5% growth rate in Q1, this implies that sales could actually contract later in the year.

On the plus side, LegalZoom says it should still generate between $75 million and $85 million in positive free cash flow this year. At the stock’s current price, this implies a price-to-free cash flow ratio of just 13.2. It won’t take a lot of growth to justify a valuation that cheap.

If the new CEO can get LegalZoom’s growth engine going again, this stock could be a buy.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.



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