CoStar Group (CSGP): The Bloomberg of U.S. Real Estate

Industry Standard Software:
CoStar’s commercial real estate software is the industry benchmark. The company consistently raises prices annually, launches more advanced subscription products, and expands globally—delivering over 10% growth annually and demonstrating resilience through market cycles.
Leading Platforms with Exclusive Data:
CoStar operates the largest platforms in the industry for both commercial real estate and multifamily rentals/sales. It leverages proprietary data accumulated from its real estate software (including information on communities, schools, etc.) to offer unique insights to users. With a membership subscription model, the platforms enjoy exceptionally high retention rates and exhibit countercyclical characteristics (for example, during periods of rising apartment vacancy rates, an increase in listings and a boost in client advertising spending are observed).
Robust Growth and New Market Expansion:
The core business continues to post double-digit growth. The recent launch of homes.com, a dedicated single-family real estate platform, is currently in the traffic acquisition phase. This new platform provides more detailed data and adopts a seller-focused business model—contrasting with the existing buyer-focused approach—unlocking significant market potential with a proven profitability model. Moreover, the management team is successfully replicating its achievements from the commercial real estate segment, and the current low interest rate environment further supports business growth.

Opinion:
CoStar Group’s integrated ecosystem, which combines robust data analytics with a diversified platform strategy, positions it strongly against its peers. The company’s proactive pricing, innovative subscription upgrades, and international expansion underscore its strategic approach to sustaining high growth even in cyclical markets. This, along with its countercyclical strengths and expansion into new market segments like single-family real estate, suggests a promising outlook for long-term investors.

Investment Memo (Quoted from a phone call)

Opening Remarks on CoStar (CSGP):
• “Recently, I’ve been researching CoStar—this is the company I previously sent you a link for. It’s a software services firm focused on real estate, specifically commercial real estate.”
• “I’ve had some exposure to this company before—I often attend gatherings at the Stern Real Estate Club and listen to senior colleagues and various industry experts discussing it.”
• “I’ve seen news on CoStar and deals executed on its platform, and through my recent research I’ve discovered that it is essentially the ‘Bloomberg Terminal’ of the real estate industry.”
• “This analogy is particularly vivid: just as everyone in finance relies on the Bloomberg Terminal because it contains every bit of global financial information, CoStar provides a comprehensive data repository for real estate—and it charges a monthly fee for this service.”

Detailing the Platform’s Functionality and Business Model:
• “In essence, it is the real estate industry’s Bloomberg Terminal—it contains a wealth of related information, including neighborhood data, local laws and regulations, property details, and agent information, all of which are monetized on its platform.”
• “Both companies and investors can use this platform to make informed investment decisions.”
• “This segment accounts for about 40% of its overall business, and it’s extremely stable—growing at double digits every year for 52 (or even 53) consecutive quarters, proving its resilience even during the pandemic.”

• “Because it sells an essential product—no matter how tight your budget, you can’t afford to lose your ‘shovel’—it’s somewhat analogous to companies like Nvidia.”
• “It continuously develops new products and expands its customer base—for example, by targeting new clients in Europe—and raises prices to keep enhancing revenue.”
• “This is a very robust and stable business.”

Focusing on the Residential Business:
• “The key highlight is its residential business, which has two components. One part is the apartments segment: back in 2014, they acquired a website that mainly provides apartment leasing services.”
• “Its revenue model is simple: apartment agents list their properties on the platform for which they must pay a membership fee plus additional promotion fees.”
• “On the rental side, listing is free for tenants—the revenue comes primarily from charging the agents. Over the past ten years, this business has grown from a $75‑million revenue operation to an annual revenue business of $1.3 billion—a 17‑fold increase—with EBITDA margins between 30% and 40%.”
• “Now, due to an oversupply in apartments, vacancy rates have risen, prompting agents to boost promotional spending and increase platform advertising, making the product countercyclical—in weaker markets, it actually earns more.”

• “I particularly like its absolute lead in web traffic—the number of visitors on its website far exceeds that of the second competitor, by two to three times.”
• “Moreover, its current performance metrics (with a mature retention rate around 51%) indicate that it no longer depends solely on advertising to acquire new customers but benefits from strong market recognition and recurring visits.”
• “Its longstanding strategy is the same: acquisitions, heavy investment, and continual enhancement of its software service experience. Once the platform matures and establishes itself as the industry leader, it will reduce advertising spend and begin to generate profits.”
• “This explains why some say its current valuation—over a 100× P/E—is high; that’s largely because in recent years it has heavily invested in homes.com, incurring significant marketing expenses (this year, for instance, about $100 million is allocated to marketing).” • “However, starting in 2025–2026, we expect these investments to taper off, allowing profits to surge.”

Long-Term Investment:
• “It is the type of company favored by long-term investors—even if short-term profits are not visible, its business model is extremely solid, its fundamentals robust, and its management outstanding. With enough patience, you’re likely to see returns.”
• “I’ve recently taken notice because influential investors have been increasing their positions. For example, both my firm and another well-known investment group have significant holdings in CoStar, which speaks volumes about its excellent business model.”

Homes.com Initiative:
• “Turning now to homes.com, I see several advantages. First, its marketing is very well funded—it has ample cash. For example, while a comparable company might have a market cap of around 9 billion, CoStar has a market cap of 35 billion with 5 billion in cash, giving it plenty of resources to ‘burn’ in the early stage.”
• “Second, it has significant experience from past acquisitions—having successfully operated several companies (including Panda.com) using the same strategy. This approach has been validated in Europe (for instance, a UK acquisition has already turned profitable), which leads me to believe that homes.com has a very high probability of success.”

Product Differentiation and Focus:
• “Looking at its product, if you’re interested, compare it to what you see on [C Lo He Res In]’s website—I personally prefer CoStar’s offering because it provides in-depth insights on communities and property details.”
• “This level of detail is built on years of relationships and resources from its commercial real estate operations, far exceeding what competitors like Zillow or Redfin brokers provide.”
• “Such detailed information is very valuable for homebuyers making informed investment decisions.”
• “Furthermore, its business model focuses on serving agents rather than just buyers. The focus on promoted listings (i.e., the property itself) rather than merely selling leads is a significant strategic difference.” • “Competitors—mainly those focused on buyers—cannot easily pivot without cannibalizing their own business, making CoStar’s approach a robust competitive advantage.”

Recent Momentum and Future Guidance:
• “Recently, its momentum has been very strong. They expect that in 2024 the runway (or growth potential) could be around 140 million, with over 8,000 agents each paying an average of $500 per month for membership.”
• “In the future, additional tiers such as a ‘gold card’ subscription service will be introduced—an approach that has already been validated. I’m not overly worried about this; my focus is on when the company can achieve sufficient scale, reduce advertising spend, and then see its profits surge.”
• “Market guidance suggests that by 2027, the company could reach $5 billion in revenue with a 40% EBITDA margin, with the business valued on an EBITDA basis.”

Valuation Thoughts and Entry Considerations:
• “Historically, its multiple has been around 34–35× EBITDA—meaning a 35× multiple would imply a certain valuation level. I currently believe that buying at a multiple around 30× might be more appropriate, potentially reaching by 2027 (roughly doubling every three years), though there is inherent volatility and uncertainty.”
• “Macro trends are favorable. With interest rate cuts, overall transaction volume is up, and subscription renewals are likely to follow, making a recovery in the real estate market beneficial. Even in a downturn, its defensive nature should help it weather the storm.”

Final Thoughts on Market Cycle and Timing:
• I’ve been reflecting on the track record of its apartment platform—how it succeeded in the past and whether homes.com can replicate that success. I reviewed past research reports and found two charts that I believe reveal the ‘wealth code’ behind its success.”

• “For instance, in 2014, when it acquired the apartment platform, it already had a modest user base. In 2016, it went public and started investing heavily. The second chart shows a dramatic spike in unique visitors, followed by a plateau and then a breakout in mid-March 2017 after two or three years of stagnation—illustrating its underlying growth logic.”

• “This growth pattern indicates that once the company starts reducing its heavy advertising spend (expected by 2025 with near elimination by 2026), profits will emerge and the stock price will rally. That key inflection point might come by the end of 2024 or in the second half of 2025, at which point both momentum traders and long-term investors will likely jump in.”

• “Additionally, there’s a secondary arbitrage opportunity: it recently acquired a 3D imaging company called Married Port (ticker MT TR) at $5.50, while its stock is now trading at about $4.40—a roughly 20% discount. Some investors fear regulatory disapproval, but given that it’s a vertical integration with little antitrust concern—and the premium paid was over 200%—the risk is overestimated. Still, because the risk is higher (if the deal falls through, the stock might drop 10–30%), this should be a smaller, cost-saving allocation (around one-third of your position).”