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Morningstar | CoStar Reports Stellar 2018 Results, Sending Shares 12% Higher

CoStar Group has continued its rapid ascent as a commercial real estate behemoth, reporting 94% year over year net income growth and revenue growth of 23%. These impressive results, combined with upbeat 2019 management guidance, have helped send the company’s shares sharply higher. Underpinning the company’s success has been a potent combination of continued growth in its flagship CoStar Suite and LoopNet offerings, as well as breakneck revenue growth from the Apartments.com website. Accordingly, we are raising our fair value estimate to $403 per share from $393 for wide-moat CoStar. This slight increase reflects an improved revenue growth and profit margin outlook, offset by a negative valuation impact from the company’s steadily increasing number of shares outstanding. At current levels, shares remain fairly valued.

Among CoStar’s various business lines, multifamily posted the most impressive revenue growth at 45% over a year earlier. This growth was driven by the successful integration of the ForRent acquisition, as well significant traffic growth on Apartments.com. In fact, management indicated that the Apartments.com network had half a billion visits in 2018, 33% higher than a year earlier. CoStar plans on continuing to pursue growth in this space by focusing on growing its appeal to owners of smaller apartment complexes, which comprise around 70% of the 45 million rental units in the U.S.

During the fourth-quarter earnings call, management revealed that it now expects its CoStar Suite salesforce to begin also selling LoopNet subscriptions. This was taken to provide customers with a single point of contact and to facilitate the sale of bundled services. We think this is a shrewd move and have incorporated higher revenue growth for LoopNet and slightly lower growth for CoStar Suite. Nevertheless, CoStar Suite remains an important driver of future growth. Accordingly, we expect revenue in this business line to grow at around 10% per year through 2028.

Information services by contrast has seen declining revenue as of late, mostly due to the phase out of the LoopNet search offering. However, we now expect this business line to see double-digit revenue growth, propelled by CoStar real estate manager. This product, which provides a cloud-based software solution for lease accounting, has been seeing eye-popping growth rates as of late. Given the increased appetite for simplified commercial real estate offerings, we expect this growth to continue.

We are likewise impressed by the recent acquisition of Cozy, which is a property management platform that streamlines the tenant payment process. Management announced that it is integrating Cozy into the Apartments.com website. We think this is a strategically sound move, as it facilitates the creation of an ecosystem that allows more aspects of the apartment leasing process to move online, ultimately incentivizing users to continue using the platform.