Third Point Management, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. Third Point returned +11.0% in the flagship Offshore Fund. For the month of April, the Offshore Fund returned +1.7%. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Third Point Management, in its Q1 2021 investor letter, mentioned CoStar Group, Inc. (NASDAQ: CSGP), and shared their insights on the company. CoStar Group, Inc. is a Washington, D.C.-based commercial property company that currently has a $33.5 billion market capitalization. Since the beginning of the year, CSGP delivered a -7.96% return, while its 12-month gains to 29.40%. As of May 07, 2021, the stock closed at $850.67 per share.
Here is what Third Point Management has to say about CoStar Group, Inc. in its Q1 2021 investor letter:
“We took advantage of the volatility in growth stocks during Q1 to establish a new long position in CoStar Group – the leading technology vendor serving the commercial real estate (CRE) industry. We think CoStar is an exceptionally high-quality “compounder” in the early innings of a transformational new opportunity which could meaningfully accelerate earnings growth. We also believe the business will be a direct beneficiary of the impending wave of COVID-induced disruption in the CRE market. CoStar’s opportunity is best understood in two parts, which we refer to as Act 1 and Act 2.
During ‘Act 1’ of its journey (the past 30 years), CoStar pioneered a new product category to create the “Bloomberg of CRE” – a suite of proprietary data, software, and advertising tools which has become the unquestioned industry standard. Industry participants describe CoStar as table stakes for doing business in CRE – a mission-critical product with powerful network effects and roughly 65% share across its core markets. Led by its visionary founder/CEO Andy Florance, CoStar has also consistently leveraged its extraordinary core franchise to penetrate adjacent markets, both organically and via acquisition. Looking forward, we believe a combination of growing market penetration (with CoStar’s markets still only 20% penetrated today) and continued margin expansion (with <35% EBITDA margins vs. peers at 55% or better) will allow CoStar to sustain mid-teens revenue growth and 20% EBITDA growth in its core franchise for many years to come.
A few months ago, CoStar embarked on ‘Act 2’ of its journey with a vision to build the “Nasdaq of CRE” – a transactional marketplace where properties can be bought and sold online. To enable that vision, CoStar recently acquired Ten-X, the world’s largest CRE auction website with 90% market share. We believe Ten-X unlocks a transformational revenue opportunity for CoStar. Real estate is the US’ largest spending category but has been the slowest to move online (nearly $1 trillion of CRE transaction volume annually, 98% of which is done offline). As online penetration grows, Ten-X’s dominant share suggests it will be the largest beneficiary, with a revenue opportunity 3x-4x larger than CoStar’s entire business today. And while Ten-X’s auction platform has always offered a compelling value proposition for owners and brokers (particularly in the underserved long tail of smaller CRE transactions), its penetration was historically constrained by weak distribution. Encouragingly, though, our research suggests it has experienced dramatic traffic growth during the past few months as CoStar has started to cross-sell the Ten-X platform into its much larger installed base. As Ten-X scales, we believe CoStar should be able to accelerate revenue growth from mid-teens to 20% and drive EBITDA growth from 20% to 30% over time.
Finally, we believe CoStar will be a material beneficiary of impending COVID-induced disruption in the CRE market. As has been well-publicized, COVID is expected to drive unprecedented changes in demand for office space (via relocation & de-densification), hospitality/retail real estate (due to tenant distress), and other CRE sectors. However, the resultant market impact has been delayed by a combination of government stimulus and long-duration commercial leases. As underlying demand disruption becomes more evident, we believe CRE arms vendors like CoStar will benefit from the increased need for property advertising (to lease vacant spaces) and transactional platforms (to buy/sell distressed properties).”
Our calculations show that CoStar Group, Inc. (NASDAQ: CSGP) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, CoStar Group, Inc. was in 51 hedge fund portfolios compared to 55 funds in the third quarter. CSGP delivered a -6.33% return in the past 3 months.
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