When close to half the companies in the Professional Services industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, you may consider LegalZoom.com, Inc. (NASDAQ:LZ) as a stock to potentially avoid with its 3.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for LegalZoom.com

How Has LegalZoom.com Performed Recently?

Recent times haven't been great for LegalZoom.com as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For LegalZoom.com?

LegalZoom.com's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.7%. This was backed up an excellent period prior to see revenue up by 38% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 8.3% over the next year. That's shaping up to be similar to the 7.0% growth forecast for the broader industry.

With this in consideration, we find it intriguing that LegalZoom.com's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given LegalZoom.com's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for LegalZoom.com with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on LegalZoom.com, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.