CoStar Group: 4Q24 Business Update
The World's Greatest Plate Spinner
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4Q24 Update.
CoStar Group grew +10% y/y, down slightly from last quarter’s growth rate of +11% y/y. This marks their 55th consecutive quarter of double digit revenue growth. This quarter was generally a continuation of trends we saw last quarter with commercial office activity still depressed. However, they noted that at the end of the 4th quarter demand and absorption for office space turned meaningfully positive for the first time since 2021.
We highlight by segment some key commentary from the earnings call and press release below. After which is our current thoughts on the business.
CoStar
“Our CoStar product achieved $1.2 billion in revenue in 2024, with a growth rate of 10% y/y. CoStar continues to be the preeminent source of information analytics for the industry. During the worst commercial real estate market in our lifetime, we have grown revenue, adjusted prices for inflation, and launch innovative, valuable new products and features like lender and hospitality benchmarking.”
“With the full CoStar sales teams focused on selling CoStar December 2024 and was the highest month of net bookings for CoStar in almost 2 years.”
“We are pleased to report accelerating CoStar sales in the year as we cross $1 billion in CoStar revenue.”
U.K. CoStar NPS has improved 35% to 65%.
Building next gen corporate real estate solution by integrating CoStar Real Estate Manager and their operation that manages 1mn+ leases to create anonymized aggregated pricing data
Building CoStar in Europe, focus on France first
Guidance: 1Q25 revenue growth of 6%, expect 6-7% for the full year
Multifamily
Apartments.com 99% renewal rate
Reached 90% of all renters and prospectus through marketing channels
Produced 1.5x more leases than all of our competitors combined
Apartments.com delivered 3x the number of leads that convert to leases compared to our competitors
In a little over a year, we are already #1 in traffic in Canada
We intend to grow the Apartment.com sales force headcount, +23% in 2025 and to keep up with the potential of the site.
Guidance: Apartments.com 2025 growth of 11-12%, 11% 1Q25
LoopNet
Moving to Asset-based pricing
Starting transition and 98% on new pricing have been retained so far
Guidance: mid-single digit growth. Noted in the future expect it to return to double digit growth
Residential
“We anticipate having 500 home salespeople by year-end 2025. And the dedicated home salespeople understand the significant value proposition Homes.com offers well. So they sell more, service more effectively, earn much higher NPS scores and renew the business at much higher rates.”
Guidance: 2025 high-teens to low 20s and 1Q25 of 40%
Company Guidance
Full year consolidated guidance of 9 to 10% revenue growth y/y or $2.95 to 3.05bn
Adj EBITDA margin of 13%
Capex estimated to be $400 to $450bn, primarily from their Richmont campus buildout
1Q25 revenue growth of 9%
Withdrawing our 5-year EBITDA target guidance issues in 2022, noting “we could not unforeseen the unprecedented long-lasting downturn in the commercial and residential businesses over these several years”
This goal was to have $2bn in EBITDA and $5bn in revenue by 2027
Industry
“Demand and absorption for office space turned meaningfully positive at the end of 2024 for the first time since 2021”
“Availability rates are falling total available space is declining. Sublet vacancy rates are falling, sublet rents are climbing.”
“The new construction pipeline is shut off and net supply after depreciation and obsolescence is contracting. The economy is strong and resilient. We read stories about major corporations mandating 5 days a week in the office and then the observation that there's not enough space for the company in their offices to allow everyone to return to work.”
Other
EBIT Margin finished the year at ~0% (versus 14% last year) as they jacked up S&M to 50% of revenues.
$500mn authorized share buyback, but only executing $150mn annually, which just offsets SBC
Seems small relative to their ~$3.5bn in net cash, but they likely want to preserve cash for potential future M&A.
Business Update & Valuation.
CoStar has been very successful in extending their growth runway, even amongst their older businesses. They continue to add more features and value to their core CoStar product, which enables them to grow that product’s TAM, despite being decades old. While the CoStar product is an extremely defensible one, it’s growth is expected to be just mid-single digits going forward. (The 10% growth experienced in 2024 was largely due to a resegmentation of where STR was recorded).
While this isn’t problematic in and of itself, it means the rest of the organization has to grow even more in order to support their continued double digit growth. Assuming the high end of 2025 guidance and the CoStar suite does 7% revenue growth, the rest of the organization will need to pull closer to 14%. Apartments.com is expected to grow 12% at the high end and LoopNet is expected to pull mid-single digit growth. With Homes.com guided to low 20s for 2025, that helps make up some of the difference.
So while double digit growth is still within reach, it only continues to get harder as their motely of businesses mature, requiring fresh investment in new verticals to stoke growth. On the other hand, though, their original value prop of digitalizing the real estate industry with data as easy to access as in public markets, is still a large opportunity. They are only just starting to tap into the European markets, which if successful could become a bigger business than their entire current CoStar business.
The more businesses they create and buy in the real estate industry, the less susceptible to downturns they become and the more synergies they realize. They announced a new product module to CoStar this quarter which will draw on their Real Estate Manager and leasing data to create anonymized pricing data. This product itself will draw new customers who may also end up inputting their lease data into the network, further increasing accuracy and thus their advantage (see our CoStar report for insight as to why they tend to do that).
Multifamily, led by the Apartments.com platform, continues to be the best place for apartment owners to generate renter leads and the platforms size means that their marketing dollars enjoy the most leverage of any business in the sector, a hard feat for a competitor to overcome.
Residential continues to be a bit of an experiment, but it looks like it is trending on the right track. All of the stats they list point to the fact that they have already a firm foot right behind Zillow. Dethroning Zillow won’t be easy, but they also don’t necessarily need to in order to have a nice business. One outcome is that Zillow continues to be a better trafficked website, but Homes.com—due to their lower friction “your listing, your lead” model—actually ends up being responsible for more home transactions and thus monetizes better.
It’s true that this is still an experiment, but at some point you have to give some credence to the pattern matching between Apartments.com, which went from a distant # 5 player to #1 in 4 years, and Homes.com, which is already a #2 platform. However, we will caveat that Zillow is a more formidable (or at least popular) competitor in residential than the competitive set Apartments.com faced in 2014.
Moving onto LoopNet, there are two big opportunities: 1) The international opportunity, and 2) asset-based pricing. On the first, they have been acquiring regional commercial real estate marketplaces and rebranding them under LoopNet. A unified brand helps them increase their marketing leverage and increases the value of the network for everyone. While they have guided to mid-single digit growth for LoopNet, longer-term they think they can get back to double digits.
The other opportunity is asset-based pricing, whereby they charge a higher price for higher value properties and a lower price for cheaper ones. This will help them increase their average contract value. CoStar noted that so far there is a 98% retention rate amongst customers they tested this pricing model out with.
While the industry is no doubt providing many headwinds that CoStar has to navigate against, they also have ballooned their marketing expense to consume almost 50% of their revenues for the year. This compares to 29% in 2019, a year they posted 26% operating margins.
Certainly, a large portion of this marketing is to launch Homes.com, but as we think of them from a mature margin framework, it also leaves the question “how much would they grow if they turned down marketing to say 20% of revenues?”
They note that they generate 43% “profit margin” for CoStar Group's commercial information and marketplace brands. Exactly what this metric represents is unclear, but it seems highly plausible they could put up at least 40%, if not 50%, margins in their core data service businesses if they wanted to just wring it for profits. However, if they did that, would their core business just be a low to mid-single digit grower?
This isn’t a hypothetical question, but is key to the multiple an investor should place on their mature earnings. At $3bn in revenues for 2025 and a 40% mature margin, they are trading at ~29x mature earnings with a $78 stock price. An investor needs to judge whether they think CoStar could still grow at least the mid-single digits with perhaps 20-30 points less of S&M if they want to get a historical stock market-like return of 9-10%. (A simple, rough formula for long-term returns is earnings yield less retained earnings plus earnings growth).
In 2022 CoStar put out a revenue target of $5bn, which they pulled this year. At the time though that implied a growth rate in the mid-teens. The real upside in CoStar is that it is the weakness in end markets that is shriveling their growth ability and when that reverses growth could reaccelerate, without even needing more “growth expenses”.
With so many different businesses, there is a lot of “surface area” for something to go right and help boost growth. At the same time though, it does seem like each business goes throughs cycles that are not dependent on just end markets, but rather the attention and investment CoStar wants to give each. There is plenty of opportunity, but where to allocate their focus seems to be in constant flux.
Andy Florance will pull CoStar’s salespeople to reassign them onto Homes.com, only to then pull them back to CoStar. When he did this he noted that these sales people were more inefficient selling homes.com versus CoStar since they knew the product less.
Now they are now implementing asset-based pricing at LoopNet, which sounds like a smart move, but also feels a bit like a reaction to slower revenue growth. It’s almost like they keep some levers hidden and just wait until they need to pull them to show growth. The international push for the CoStar Suite seemed to have taken a back seat to other priorities for years. Now that CoStar is maturing in the US, it is getting renewed focus.
All of this can seem like a criticism of a manager who is too scrambled across too many different business lines and only gives attention to a segment as it starts to suffer. On the other hand, this can also be a mark of a great manager who only deals with the highest priority problems.
Andy Florance has a knack for focusing on each business line at the right time, so growth never fades too much. Watching him run CoStar sort of feels like a spinning plate act, where he is constantly moving around the business to reaccelerate momentum. This is why it is very hard to picture CoStar’s success without Andy Florance who has been spinning the plates since 1987.
Having said that, and in line with one of our favorite questions—“can you have a quality business without a great manager?” Most of CoStar’s many businesses are very hard to disrupt and have great moats, but it’s hard to think they wouldn’t suffer without someone like Andy Florance constantly intervening to keep momentum.
Given the mature margin and valuation comments we made earlier, an investor has to essentially judge whether they believe the quality of these businesses is potentially worth accepting a lower return, or whether they believe that even with much less investment in the business it could grow mid to high single digits. Or in other words, would a “Year of Efficiency” (in reference to Mark Zuckerberg drastic expense cuts at Meta) make the business more profitable without issues, or would it wreck it?
As a reminder, we named our research firm Speedwell Research after the ship that helped ferry passengers to the Mayflower. The idea is that we want to help you take your journey, but ultimately you are on your own in the decisions you make. An investor must judge for themselves whether they believe the opportunity is worth it and accepting the potential risks that could materialize.
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*At the time of this writing, one or more contributors to this report has a position in CSGP. Furthermore, accounts one or more contributors advise on may also have a position in CSGP. This may change without notice.