CS Disco, Inc. (LAW) stock intrinsic value fair value estimate & owner earnings analysis

DISCO (NYSE: LAW) sells cloud software that law firms, corporations and legal departments use to review documents in litigation and investigations. Revenue was $156.8 million in 2025, up 8.3% from $144.8 million (2024 growth was 4.9%, 2023 growth 2.1%). Software was $134.0 million and services $22.8 million. Gross margin is about 75%. About 91% of revenue is usage-based (89% in 2024) and only 9% is subscription. The filing shows customer contracts can be cancelled on one month's notice, and remaining committed revenue was only $23.1 million ($14.8 million due within 12 months). So the revenue is real and has risen every year since 2020, but it is not contractually locked in. How we value it: owner earnings are operating cash flow, less swings in working capital, less stock-based compensation (a real cost, paid in shares), less the capital spending needed just to stand still. On that basis DISCO has lost money every year we can measure: about -$0.71 per share in 2021, -$1.15 in 2022, -$0.66 in 2023, -$0.63 in 2024 and -$0.73 in 2025. In 2025 that was a loss of about $45.2 million: cash used in operations of $14.9 million, plus $24.5 million of stock compensation, plus about $2.7 million of maintenance capital spending, with about $3.1 million of favorable working-capital timing removed. Nearly $10 million of the cash gap is paid in shares rather than cash, which is why the true cash drain looks much smaller than the owner-earnings loss. We treat that share issuance as a cost to existing owners. If a reader views stock compensation as free, the value below would be higher. With no positive earnings to discount, the value of the shares comes mainly from the company's cash and short-term investments of $114.6 million ($19.7 million cash plus $94.9 million of Treasuries and corporate debt) at year-end 2025, about $1.81 per share on 63.3 million shares outstanding, less the loss it takes to keep operating. We also deduct about $3.5 million for the securities class action filed in September 2023, which the company has agreed to settle subject to court approval: it booked an $11.5 million accrual in 2025, offset by an $8.0 million insurance recovery receivable. Separately, the company has $81.9 million of non-cancellable cloud-hosting and software purchase commitments running through 2029 ($24.6 million due in 2026), which is why costs do not fall quickly if revenue softens. What changed in 2025: revenue growth sped up and operating leverage showed up. The operating loss, excluding the litigation costs ($9.2 million in 2025, $0.8 million in 2024) and the $15.2 million non-cash write-down of an acquired intangible asset and capitalized development in 2024, narrowed from about $45.8 million to about $39.0 million. But owner earnings did not improve, from -$37.9 million in 2024 to -$45.2 million in 2025, because stock compensation rose from $22.3 million to $24.5 million and interest income fell from $6.3 million to $4.5 million as the cash pile shrank. The write-down is added back automatically in our method as a sunk acquisition cost; it is a small mark against management's capital allocation. Bear case, $0.00 per share. Owner earnings stay at the 2025 loss of $45.2 million. The $111 million of cash left after the litigation deduction covers roughly two and a half years of that loss, and nothing we can name and evidence funds the business after that; usage-based revenue can be cancelled monthly and the purchase commitments continue. The arithmetic comes out slightly below zero (about -$0.15 per share), and we show $0.00 because shares cannot be worth less than nothing. Base case, $0.07 per share. The loss holds at the 2023-2025 median of about $39.8 million a year (we use 2023-2025 because 2021 was distorted by the July 2021 IPO and 2022 was the peak-spending year). The trailing figure is worse than that median: owner earnings deteriorated about 19% from 2024 to 2025. We start from the median rather than the 2025 figure because 2025's stock compensation and lower interest income were partly offset by the $6.8 million narrowing of the underlying operating loss described above; we credit no further improvement and no revenue growth, because usage-based revenue with one-month cancellation is not in the bag. At that pace the cash runs out in about three years, and after that we credit nothing. The present value of the cash less three years of losses is about $4.7 million, or $0.07 per share. Bull case, $1.13 per share. The 2025 pace of operating improvement (about $7 million a year) repeats: the loss narrows from $45.2 million to about $38 million, $31 million, $24 million, $17 million, $10 million and $3 million, turns to a profit of about $4 million in year seven and about $11 million in year eight, then holds at $11 million through year ten. We credit that level for ten further years (through year 20) on the strength of the record that revenue has grown in every year from 2020 to 2025, from $68.4 million to $156.8 million, and that operating expenses excluding litigation rose only about 2% in 2025 against 8.3% revenue growth. Nothing beyond year 20 is credited. Cumulative losses in this path are slightly larger than the cash on hand, which is already reflected in the present value. That works out to about $0.42 per share for the first ten years and about $0.71 for the second ten. What would make this wrong: a sustained cut in stock compensation without hurting growth would move the business toward breakeven faster than our bull path; a large outflow to settle the class action beyond the recorded accrual, or a loss of usage volume from large customers, would push toward the bear case. We could not determine from the filings what share of usage comes from the largest customers. The margin-of-safety price of $0.50 is the price from which the bull case implies roughly double the value, while the bear case has the cash burn consuming the balance sheet; it applies only if the business has shown it can approach self-funding, as described in the trigger.