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Morningstar | CoStar Posts 20% Revenue Growth in 1Q; Shares Overvalued

CoStar Group has once again reported impressive financial figures, with first-quarter revenue growing 20% and net income increasing 63% over a year earlier. While these results underscore the strength of CoStar’s business model, they are largely in line with our expectations, solidifying our long-term thesis. We are raising our fair value estimate for wide-moat-rated CoStar to $409 per share from $403 primarily due to the time value of money. We think investors have reacted too enthusiastically over the past few months to CoStar’s remarkable growth profile, and we thus view the shares as overvalued.

CoStar has recently shifted focus to bolstering its sales efforts as it seeks to reap the gains from the investments it has made in the Apartments.com platform. To this end, management indicated that companywide sales meetings are up 43% over a year earlier, with that figure increasing 33% on a per-salesperson basis. This increased focus seems to be paying dividends, with the Apartments.com website seeing 162 million visits in the first quarter, a 35% increase over the first quarter of 2018. As a result, the multifamily business line saw revenue growth at around 30% compared with a year earlier.

CoStar Suite posted healthy revenue growth of 13%. The information services business line reversed its trend of revenue declines with revenue increasing 25% over the first quarter of 2018. This reversal was driven by buoyant demand for the CoStar Real Estate Manager product, which has been aided by the introduction of a new real estate accounting standard. Finally, the commercial property and land business line grew at 17%, with impressive growth in LoopNet driving this increase. In the long term, we see the bulk of CoStar’s growth coming from the multifamily space, where its advertising investments should begin to pay off in the form of market share gains.