I am looking through the guidance and upgrading the stock to a strong buy.
When I explained why LegalZoom (NASDAQ:LZ) shares are still struggling, my radar did not include another collapse in the stock price. Almost two weeks ago, in a surprise move, the company announced that Jeff Stibel, chair of the Board for LegalZoom, replaced Dan Wernikoff as CEO. The reaction in the stock was sharp and swift. The dust settled for the day on a 25.4% loss, with the stock down as much as 32.1% at one point.
This was the kind of panicked selling that instantly motivated me to buy shares. This sell-off was an overreaction and quick trigger move in response to surprise news (sell first, ask questions later). However, unlike the last sell-off that was an overreaction to the threat of generative AI and ChatGPT, sellers have relatively valid reasons to worry. As I noted before the CEO switch, the company’s performance was tepid and a generative AI product was curiously fading further out into the horizon. Thus, this CEO change suggests operations under the hood could be worse than they appear. Accordingly, my lingering bullish case for LegalZoom now rests on the revitalization that Stibel can bring.
Fortunately, Stibel’s record suggests that he can provide the breath of fresh opportunity that CEO switches can often provide.
LegalZoom’s press release does not do Stibel full justice. The company had this to say about Stibel:
“He is a seasoned executive who has been a deeply involved member of the Board for nearly a decade, including serving in a leadership position as Chairman since 2018. Jeff possesses extensive knowledge of the Company’s product offerings, technology infrastructure, and attorney network, as well as the competitive landscape and customer segment. He also brings ideal experience to the role, having been an executive officer of numerous technology services companies where he successfully scaled and enhanced profitability for subscription technology offerings – an increasingly key strategic focus area for LegalZoom. Finally, as one of our largest individual investors, Jeff will be closely aligned with all our shareholders as he focuses on creating long term value.”
This description alone should give investors plenty of encouragement. The company went on to describe important and relevant highlights of Stibel’s career:
All of the above-mentioned companies were a part of the Bryant Stibel portfolio. LegalZoom is also part of the portfolio. Bryant Stibel has some impressive exits on its books, including Alibaba.com (BABA) and Dell Technologies (DELL). Some exits have been duds in the public market, like Dun & Bradstreet Holdings, Inc. (DNB) which has trended nearly straight down to its public debut in July 2020. So LegalZoom’s association with Stibel is no guarantee of winning. What I like about Stibel is his background and philosophy.
In an interview on CNBC including Kobe Bryant (YouTube title “Kobe Bryant and Jeff Stibel on the growth of their venture capital fund”), just months before Bryant’s tragic death in a helicopter crash, Stibel explained their venture’s approach to identifying good businesses and strong teams. A background in cognitive and neurosciences directs Stibel toward quality decision-making.
In an interview (YouTube title “Neuroscience & Entrepreneurship with Jeff Stibel: First Star National STEAM Academy Tech Talk”), Stibel revealed how he was a below-average student, but following his passions help lead to his string of successes. He used the doubts of naysayers as motivating fuel. Professors even told Stibel that he should not go to college, but he did anyway. He was told that a scientist cannot make it in business, so he did it. Stibel proclaimed that the more people tell you not to do something, the more you should rally around doing it: you now have something to prove. Anyone doubting Stibel can revitalize LegalZoom will provide fuel for a turnaround. Certainly, the plunge in the stock price is partially a vote of no-confidence in Stibel which should in turn motivate him to provide the panickers wrong.
Stibel has also demonstrated an ability and willingness to change course as needed. Stibel also loves learning so much he is not afraid to pivot “over and over and over again.” He looks at failure as a learning opportunity: “When I fail, I always know why I failed. I always kick myself, I learn a little bit and then the next time I fail a little bit less. That’s the trick in life: fail less, and you know as you continue going on in life with that perspective you fail less and less and less and less and then other people know what you call failure is actually a success.” This attitude obviously suits a venture capitalist. Given Stibel’s long history, hopefully, he has accumulated enough knowledge to minimize future failures at LegalZoom.
Interestingly, Stibel thinks we as a society are over-leveraging technology. That is, sometimes it is good to think contrarian and ask what technology should get turned off. Where is technology actually getting in the way? I will be interested to see where and how Stibel will apply that philosophy at LegalZoom to simplify the business and perhaps reduce pressures to leverage technology (artificial intelligence) to replace human expertise.
While Stibel is a great choice for LegalZoom’s CEO, real risks lay ahead. The company lowered the bar for Stibel in the next earnings report by reducing guidance. While it left Q2 revenue and adjusted EBITDA guidance untouched and reiterated full-year adjusted EBITDA, LegalZoom reduced revenue expectations from $700M to $720M to $675M to $685M. The company also reduced free cash flow guidance for the full year from $85M to $95M to $75M to $85M. The change in revenue guidance is small and unremarkable, -4% at the midpoint. However, the free cash flow guidance dropped 11% at the midpoint in the wake of the company recently increasing its authorization for share repurchases by $75M to a cumulative $175M. The reduction in free cash flow is likely to slow if not altogether halt share repurchases, even with the stock now around all-time lows. This enticing discount may have to wait for the company to maintain investor confidence in free cash flow trends. Next earnings may provide insight on the company’s cash management. In the meantime, I am assuming I cannot rely on share buybacks to prop up the stock.
LegalZoom also has product strategy risk. Given Stibel’s philosophies, the company should undergo a thorough review of product plans and strategies, Some initiatives will end. A few initiatives will receive more fuel. Perhaps Stibel will push the team to invent new product initiatives. All the new swirl will generate both promise and uncertainty for analysts and investors, especially if the changes involve pivots and learning from failures.
Stibel’s penchant for shaking up plans is evident in his approach to entrepreneurship. In a lecture on entrepreneurship at Cal Lutheran on March 6, 2019 (YouTube title “CLU | Entrepreneurship Speaker Series – Jeff Stibel”), Stibel had the following to say about plans and planning:
“If you’re beholden to your business plan, you’re as shackled as they are [big businesses]. So ultimately you have to be willing to give up your business plan. Don’t get me wrong, plans are important, but the only thing that I’ve seen in my history as an entrepreneur, as a business leader, and as an investor, when it comes to plans, whatever plan you have it’s wrong – guaranteed. I have yet to see a business plan succeed on the business plan’s merits. What is important is how you think, how you process, how you get that on paper, and then whether or not you’re willing to adapt.”
In other words, expect bold changes. Putting together the earlier promise I saw in LegalZoom along with Stibel’s potential to shake things up in a positive way, I am looking through the reduced guidance and upgrading LZ from buy to strong buy. LZ’s relatively low valuation also makes it easier for me to take on this risk: 12.8 forward P/E, 1.8 trailing and forward price/sales, and an all-time low EV/EBITDA ratio.
