Why This CS Disco Analyst Is Downgrading Legal Services Stock After Q2 Earnings

CS Disco Inc LAW reported mixed results for its second quarter, with revenues below Street estimates and higher-than-expected EBITDA.

The company’s revenue miss was due to higher review product volatility, while its operating margins contracted in the quarter but came in better than anticipated, according to BofA Securities.

The CS Disco Analyst: Koji Ikeda downgraded the rating for CS Disco from Buy to Neutral, while reducing the price target from $34 to $25.

The CS Disco Thesis: Following the company’s downward revision of its revenue and earnings guidance for 2022, shares could remain rangebound until there are signs of the revenue model volatility experienced in the quarter not being an ongoing issue, Ikeda said in the downgrade note.

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“Usage of Review was lower than expected in Q2, which drove the soft revenue result,” the analyst wrote. “Furthermore, lower visibility into future Review usage is resulting in mgmt lowering its 2022 revenue growth target to +17% y/y at the midpoint, which is well below the +32% prior guidance,” he added.

“We believe the revenue guide down and mgmt commentary on revenue predictability could put into question the stability of the future growth profile and the potential for the business to display 30%+ growth over the medium-term,” Ikeda further mentioned.

LAW Price Action: Shares of CS Disco had tanked 52.63% to $13.18 at the time of publication Friday.

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