When CS Disco (LAW -1.00%) went public in July 2021, it impressed the bulls with its goal of streamlining law practices with artificial intelligence (AI), cloud computing, and data analytics services. According to the company, its software cuts through all the paperwork to "let lawyers spend their time doing what matters most."

CS Disco priced its IPO at $32, and its stock opened at $44 before soaring to a record high of $65.88 on Sept. 8, 2021. But today, it trades at about $6 a share. It lost its luster as its revenue growth cooled off, it remained deeply unprofitable, and rising interest rates popped its bubbly valuations. The abrupt resignation of its co-founder and CEO Kiwi Camara amid sexual misconduct allegations earlier this month raised even more red flags.

A lawyer uses a tablet computer outside of a courthouse.

Image source: Getty Images.

So will CS Disco's battered stock bounce back over the next 12 months? Or will its decline continue as investors grow weary of its sluggish growth, red ink, and murky plans for the future?

Why did CS Disco's growth stall out?

CS Disco's revenue rose 67% in 2021, but only grew 18% in 2022 and declined 1% year over year in the first half of 2023. It expects its revenue to rise 0% to 7% for the full year. 

CS Disco blamed that slowdown on the macro headwinds that forced its clients to rein in their spending. It continues to gain more customers, but it isn't consistently squeezing out more revenue from those customers. That's why its total number of customers grew 14% year over year to 1,431 in the second quarter of 2023, but its total revenue only rose 2%.

CS Disco's margins are also being compressed as its revenue growth slows down. Its adjusted gross margin rose from 73% in 2021 to 75% in 2022 but stayed flat at 75% in the first half of 2023. Its adjusted operating margin dropped from negative 16% in 2021 to negative 32% in 2022, then slipped to negative 34% in the first half of 2023.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin fell from negative 14% in 2021 to negative 33% in 2022, then stayed flat year over year at negative 30% in the first half of 2023. Yet it expects that figure to rise to about negative 23% for the full year as it lays off 9% of its workforce and executes other cost-cutting measures.

On a generally accepted accounting principles (GAAP) basis, its net loss widened from $24 million in 2021 to $71 million in 2022. It racked up a net loss of $35 million in the first half of 2023, and analysts expect it to post a net loss of $59 million for the full year. Its cash and equivalents also declined 22% year over year to $179 million at the end of the second quarter, but its low debt-to-equity ratio of 0.1 still gives it plenty of room to raise more cash if its coffers run dry.

Does CS Disco have a turnaround plan?

CS Disco expects to increase the stickiness of its ecosystem with its new AI tools -- which include Cecilia, an integrated AI chatbot for large-scale data discovery; and generative AI features for its Case Builder platform. It's also gradually expanding beyond the U.S. with new product launches in Canada and India.

Yet CS Disco still faces plenty of competitors in its niche. Most of its rivals are smaller start-ups like Leap Legal, App4Legal, and Needles, but it might only be a matter of time before larger enterprise software companies creep into its backyard.

The sudden departure of Kiwi Camara, who led the company since its inception, also casts dark clouds over its future. On the bright side, its insiders bought 12 times as many shares as they sold over the past 12 months -- so its employees might think its stock is undervalued at less than 3 times this year's sales.

With a market cap of less than $400 million, CS Disco could still be a compelling takeover target for a database giant like Oracle (ORCL -0.16%), which already owns the information discovery platform Endeca; or Microsoft (MSFT -0.26%), which could expand its enterprise software ecosystem into the legal market with Disco's tools.

Where will CS Disco's stock be in a year?

CS Disco's stock might look a lot cheaper than it did at the peak of the meme stock rally, but I don't think it's a screaming bargain yet. Investors should stay away from this out-of-favor stock until the company appoints a permanent CEO, finds fresh ways to stabilize its sales growth, and meaningfully narrows its operating losses.