CoStar Group Inc (NASDAQ: CSGP) is among the top providers of global commercial and residential real estate market news and insights as well as online property marketplaces via subsidiaries like Apartments.com, LoopNet, homes.com, and Ten-X. The company’s revenues are split between its core suite of comprehensive CRE tools backed by proprietary data and online marketplaces. CSGP helps real estate owners, agents, lenders, and service providers buy, sell, lease, and value assets with information curated by the world’s largest CRE research team. The company tracks over 7 million properties and recorded a 2023 revenue of $2.46 billion. Here, we summarized a March-end bullish thesis published by Fat_Tony on Value Investors Club.
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The thesis sees the 1.5-million-strong National Association of Realtors (NAR) antitrust claims settlement, CSGP’s homes.com and international push, and its organic core business growth with margin expansion as catalysts that could drive value creation or earnings growth of over 15% for the coming years. NAR’s settlement translated to new rules that could upend the legacy 5%-6% commission structure US legacy model of monetizing buyer leads, facilitated through NAR’s influence on multiple listing services (MLS) and associated rules. The new regulations, designed to eradicate “steering” or agents showing homes to clients that paid higher commissions, prevent buyer agents from accessing databases for houses based on how much commission they can earn. Furthermore, buyers must enter a legally binding contract with their buyer agent before they can tour homes. This could push away potential homebuyers who are nervous about legally binding relationships with brokers before touring homes to more transparent listing models. The unbundling of buy-side commissions could severely impact businesses like Zillow, which could be forced to pivot from heavily relying on buy-side broker monetization to monetizing sell-side listings. However, CSGP’s homes.com is well-positioned for the major change in the real estate market with a business model of monetizing seller listings. Zillow co-founder Spencer Rascoff said last year that the unbundling of buy/sell-side agent commissions could be seismic for many companies but would be “a gift from heaven” for CSGP, given their suitable model with similarities to several global markets with no buy-side brokers.
NAR settlement could also break the MLS monopoly on listings as there remains no mechanism for commission-sharing, and real estate agents are not mandated to list all properties on MLSs. The thesis argues that this development offers an opportunity to replace existing MLS networks with private inventory databases like homes.com to converge to market structures in international markets. Real estate agents may also find relief from the monthly fees to access local MLSs and significant listing costs. Elsewhere, CSGP has decided to invest almost $1 billion in homes.com in 2024, a 100% year-over-year increase, focusing on marketing efforts. The company will retain a strong balance sheet with over $4 billion in net cash and a positive free cash flow despite homes.com’s expenses. CSGP is buying traffic for homes.com and has made it the second-best home portal in a year. However, they have recently begun monetizing that traffic. The company took a similar approach with apartments.com, sustaining traffic while building a brand as inbound traffic converted into organic traffic. CSGP is monetizing listing brokers and not the buy-side. With CSGP booking over $5 million in net new ARR/week during the end of Q1, the thesis highlighted that the company could make another attempt at acquiring realtor.com, which slipped through last year over price disagreements. NAR’s settlement rules pose major risks for realtor.com, which could open the gateway for a sale opportunity at a discount. CSGP’s takeover of realtor.com would immediately boost homes.com’s business with access to 60 million new realtor.com users. The thesis argues that while Zillow and realtor.com make almost $7 per monthly active user (MAU), homes.com could generate revenues similar to international peers that make over $30 per MAU.
CSGP’s international expansion efforts are evident from its £100 million 2023 acquisition of OnTheMarket, one of the top three UK listings sites, which had 29% of market traffic in late 2023. CSGP CEO Andy Florance is mulling Europe expansion with billions in cash reserves, focusing on tier-2 listings, traffic generation and monetization, and investments to enhance website performance. While the company’s core suite business has considerable exposure to the ongoing CRE cycle, Andy has noted that this year will be the bottom of the cycle as CRE transactions remain at decade-low levels. The thesis values the company based on the amount paid for CSGP’s core businesses, ex-homes.com, while separately valuing homes.com. Although the company maintains a high P/E ratio that may prove costly for investors, CSGP’s core business EBITDA margin of over 40% could drive consistent value creation over the next five years.
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Disclosure: This article was originally published at Insider Monkey.
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