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Morningstar | CoStar Group Set to Continue its Blistering Pace of Revenue Growth; Shares Fairly Valued

CoStar Group has consistently exceeded expectations since its IPO in 1998, with the company having firmly cemented its position as the pre-eminent provider of commercial real estate data in recent years. We expect this impressive streak will continue, driving double-digit revenue growth over the next several years. Accordingly, we maintain CoStar’s wide moat and positive trend ratings and are increasing its fair value estimate slightly to $393 per share from $357. We think the market recognizes CoStar’s growth potential, and as such we contend that its shares are fairly valued.

With founder and CEO Andrew Florence at the helm, CoStar has built its core business by selling real estate data to institutional clients. The company employs an army of over 1,800 researchers to gather data from brokers and owners of property. These researchers are tasked with both data collection and quality control, sometimes physically visiting properties to verify certain information. CoStar then turns around and sells this data in the form of its CoStar Suite offering, often to the very same individuals who provided the information to begin with. This business model is effective because each provider needs access to the aggregated data in order to effectively conduct business in commercial real estate.

CoStar Suite comprises around half of companywide revenue, and we expect this business line to contribute revenue growth of around 14% over the next several years. This elevated growth rate is predicated on CoStar’s ability to continue upselling users of its legacy LoopNet data offering to the more expensive CoStar Suite platform. Further contributing to growth will be the company’s focus on curbing password sharing behavior among its client base. These two factors, combined with an already established ability to push consistent above-inflation price increases to customers, leave us confident that the company’s flagship product retains significant growth potential.

More recently, CoStar has been pursuing growth in the more fragmented multifamily listing space, which includes the Apartments.com and ForRent.com websites. Combined, CoStar’s multifamily platforms contribute about one third of companywide revenue. Following its acquisition of Apartments.com in 2014, CoStar has pursued a far-reaching advertisement campaign featuring Jeff Goldblum in a bid to increase its share of transactions among apartment dwellers. We think these efforts are likely to be successful, underlying our positive trend rating based on an improving network effects moat source. Accordingly, we expect growth in the high double digits over the next several years before ultimately tapering off once significant market share has been taken.

CoStar’s commercial property & land business line, which comprises about 15% of companywide revenue, includes platforms such as LoopNet and LandsofAmerica. These websites allow buyers and sellers of real estate to transact with one another, with CoStar deriving its revenue from listers who choose to pay a subscription-based advertising fee. Despite the hefty fees involved, it still makes sense for property owners and brokers to pay up given the size of commercial real estate transactions. We think this business line is poised to see high-single-digit to low-double-digit growth over the next several years. Finally, the company’s information services business line, which includes the legacy LoopNet search tool among other miscellaneous business items, is likely to see tepid growth below the rate of inflation over the next several years.