Bank of America double upgrades LegalZoom on strong AI opportunity

Bank of America upgraded LegalZoom (LZ) to Buy from Underperform, raising its price target to $12, implying 43% upside. Analyst Michael McGovern cited the company's successful shift to subscriptions and strategic AI collaborations with Perplexity and OpenAI's ChatGPT as key drivers, which are expected to accelerate online legal service usage and sustain double-digit subscription revenue growth. BofA anticipates multiple expansion for LZ given its current valuation and strong free cash flow trajectory.

Analysis

Bank of America has upgraded LegalZoom (LZ) from Underperform to Buy, increasing its price target to $12, which suggests a 43% upside from current levels despite the stock's 11.5% year-to-date gain. The upgrade is primarily driven by management's successful execution of its strategic shift towards a subscription-based model, which is now expected to sustain double-digit revenue growth well into the next year, significantly exceeding prior expectations. This growth is supported by effective bundling strategies and strong renewal rates, with Average Revenue Per User (ARPU) anticipated to become a more significant contributor to growth. Furthermore, LegalZoom's strategic AI collaborations with Perplexity and OpenAI's ChatGPT are viewed as a key catalyst, creating a new client acquisition funnel by leveraging accelerating AI adoption in online legal services. While the analyst acknowledges the long-term threat of a potential AI-native competitor, the current outlook is favorable, supported by a solid free cash flow trajectory and a discounted valuation multiple that presents an opportunity for expansion.

Key Decisions for Investors

• Given the BofA upgrade, strong subscription growth outlook, and potential for multiple expansion, investors may view this as a favorable entry point or an opportunity to increase their position in LZ.
• Key performance indicators to monitor in subsequent earnings reports include the sustainability of double-digit subscription revenue growth and initial signs of ARPU expansion, which are critical to validating the analyst's thesis.
• While the AI collaborations are a significant positive, it is crucial to monitor the competitive landscape for the emergence of AI-native legal tech firms that could pose a long-term threat to LegalZoom's business model.