Chit Chat Stocks - Costar Group: A Fallen Compounder Down 70% From Highs (Ticker: CSGP)

Episode Date: August 19, 2026

On this episode of Chit Chat Stocks, we dive into another Ryan Research episode covering Costar Group (Ticker: CSGP). We discuss: (00:00) Introduction (02:11) Founding of CoStar and Andy Florence's background (12:32) Industry landscape and CoStar's monopoly in commercial real estate data (19:37) Revenue growth, pricing power, and diversification (22:29) Major acquisitions: Loopnet, Apartments.com, and Homes.com (33:28) Competitive advantages and moat of CoStar (41:41) Comparison with Zillow and industry moat (49:25) Marketing spend, growth, and recent challenges (55:13) Valuation, activist involvement, and future outlook ***************************************************** Subscribe to our newsletter, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

For the past three years, Interactive Brokers' individual clients averaged 24.3% annually, beating the S&P 500. Lower costs and access to 170-plus global markets matter. Visit ibkr.com slash performance. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast.

Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode. Welcome into the Chitchat Stocks podcast, a podcast to help you find your next great investment. My name is Brett Schaefer, and I'm joined by my co-host, Ryan Henderson, for another Ryan Research episode. Last time, listeners seemed to have enjoyed our coverage of a fallen angel or a fallen compounder, a.k.a. Copart. So we are continuing this theme for the next episode, well, today's episode, and we are covering CoStar Group.

Ryan may have the figures, but I think it's down at least 50% from Heinz. Ryan will have the exact figures for the listeners as we get into the episode. But before we begin, let's remind listeners, we always do on our individual episodes without any guests, to give us a five-star review on Spotify or Apple Podcasts and join the chat community in the Emerging Motes newsletter. The link will be in the show notes, even though it's called something different than the podcast.

Just think of it as also the Chit Chat Stocks podcast community. We talk all things investing and the podcast within the chat. You can ask me or Ryan a question at any time, and we're active every day on there. So let's get to CoStar Group. Ryan, take us through how this business was formed and who is the co-founder and CEO, I believe still the CEO today, Andy Florence. Yeah, and he's pretty much the sole founder. although there was uh an early investor uh that helped him as well but the co-star group yeah

people seem to love fallen angels as you know as they should it's a good chance to buy stocks buy quality businesses when they're down a lot uh co-star group i think could be put into that camp we're going to dissect it today and see whether or not this will be a continuously falling angel or not but yeah it's down almost 70 from its highs let's talk about the business co-star group was founded in 1987 86 really uh by a guy named andy florence i'll spend a little bit of time on andy because he's sort of a controversial figure and he's still the ceo today and And even though he doesn't have massive voting power, it seems he's built a board around him that likes him, respects him. He has a very strong track record of expanding data businesses, acquiring and expanding them, and building a moat around his different data sets and marketplaces that he sells.

so he is sort of the ultimate decision maker at this company so to go through his history a bit andy florence i believe was raised in new york city his father was apparently a prominent architect but apparently his father wasn't that present in his life and when his parents split at the age of 11 he spent a little bit of time homeless actually i find that that was kind of a bizarre fact that i found but he mentioned that i believe in his commencement speech at vcu that he did recently and a year later so after he's homeless a year later i believe at the age of 12 he was able to get into a music school in new york city and that school was one of the few in the area at the time that had a computer because think this is like i think late 70s maybe early 80s and that's

where he learned to write code so he was i guess a programmer developer from a young age uh and those computer skills eventually paved the way for him to go to princeton fun little factoid here uh while at princeton he studied economics and his lab partner was none other than jeff bezos quite the successful little duo uh they both that is funny yeah well two pretty successful groups what's costar's market cap today probably a little lower than amazon's but 12 13 billion dollars that's some good value graded for shareholders there we go yeah you know it was much higher the uh it was actually i think from ipo because both companies both bezos and andy florence started companies uh i guess andy started what would become costar a little earlier but

They started their own businesses, IPO'd them in the late 90s, and they actually had nearly identical stock performance up until sort of the AWS IPO and then Amazon basically took off and CoStar has not performed nearly as well. So anyways, nonetheless, one of Andy's sort of early fascinations was digitizing public records. I don't know if I'd call it a fascination, but he saw the opportunity that was there. Keep in mind, this was early to mid 1980s. So a lot of important records were still kept only by physical copies, or maybe they were in certain places on the internet, but they were siloed to whatever. before the internet right sorry maybe there was digital databases but it was strictly for say uh yeah you know kept it to an individual business that kind of thing yeah we're still in the early ages of the home computer at that point that's still like a luxury item for people right florence saw the opportunity here i mean this was i assume i don't know this era that well but i assume there was a wave of digitizing public records that quickly became like strong businesses for everyone um and he was right there to capture it he actually did this with sec data

for public companies early on i believe he sold one of his early digital data businesses as well i can't remember um what the price was for but he while studying economics at princeton he thought OK, everyone pays attention to stocks, bonds, all the data around them. S&P Global was already a big business. I don't think Bloomberg was quite I don't think it was even started yet. But there was data businesses around stocks and bonds. There really wasn't for real estate, at least commercial real estate. So he saw the opportunity here, and out of his dorm room in 1986, he founded a company that would – it really wasn't a company at the time. He founded an idea that he turned into Realty Information Group. This would later become CoStar. And all he did here was him and some employees that he hired, he would pour through city and county filings as well as public deeds and try to find information about big commercial buildings. This was just things like building measurements, zoning classifications, the ages of the building, when they were built, any plot maps that he could find.

And he'd manually port those records over onto a digital database. And so he would literally just go to the county municipal buildings, go through these filings, and port them over by hand. He would also call up business owners or building owners and ask them for information about their leases. So what's the price per square foot? What's the current lease expiration? How many tenants do you have? Occupancy rate? Stuff like that.

And some of these building owners were just willing to give it away because maybe it leads to a new tenant. whatever he amassed this pretty big sizable data set um and it was very valuable to the right customer and he built sort of a centralized repository for it in the early days he didn't like he didn't have the whole country's records obviously he kind of had to go city by city but starting in new york city uh obviously a very valuable place to begin so this quickly became a pretty sought after data set the business was officially formed 1987 so a year after he started going to work uh on amassing this and then i'm kind of going to breeze through some of the other early history but in the early 90s they started selling software licenses i guess it was

like they also sold i think paper license there was like a physical element to the business but But then in like 93, he said, we're just sticking straight to software. This is where we're going to head. This is what people will want in the future. And real estate brokers, as well as prospective tenants, were buying this. Like it's super valuable data set for them. And one of the things they did early on that became sort of integral to their success now is they encouraged a give-to-get model where brokerages could trade their private listing data in for access to CoStar, to that shared system. So you give us all your data about all the listings you have, and we'll let you see everyone else's, basically.

That little trick created a powerful network effect that – essentially of super valuable user-generated data and it ends up becoming one of the biggest factors of their moat today and kind of insulates them from competition. The company officially went public in 1998, and they have since acquired maybe 100 other businesses, maybe not that much, but they were sort of a serial acquirer of data services and marketplaces. And even with the recent 70% drawdown, shares since 1998 have compounded at just over 13% per year. So still really solid returns, not quite a hundred bagger, but you maybe would have had a hundred bagger a year and a half ago or you could have been close to that. So that's kind of the journey to where they're at. We'll go through some of the acquisitions and more of the business model, but any questions there, Brett? I don't think so. The internet is saying 23 acquisitions, but it might not be going all the way back to the late 80s.

But yeah, quite an acquisitive company. We'll get into things there. We'll talk about homes.com. I know many listeners, if they're familiar with the stock, we'll be talking about that as well as apartments.com and kind of the general strategy today. But we need to look at, Ryan, what this, I don't even know exactly what industry to call it. Is it just commercial real estate data, something like that? Also, they're getting into residential real estate, so it's not just commercial. But a lot of people, listeners, will be familiar with either the listing market if they're not out of the U.S., Zillow.

Maybe you have your local one out there. You have the Redfins. You have the Homes.com, as we'll talk about. But many are not going to be interacting with what CoStar operates, which is their own website as well as LoopNet, correct? Is the core one there? So what does this industry look like? How do they compete? And why are they considered, I'm asking your own question here, the Bloomberg of real estate?

Yeah. Now, for all intents and purposes, CoStar operates essentially a monopoly in the market for commercial real estate data. Now, they've diversified the business a lot, as Brett mentioned, so they're not necessarily a monopoly in all their sort of subsectors. But commercial real estate specifically, they are the only true end-to-end data provider. There are some alternatives in sort of specialized niches, specialized regions. But, yeah, as far as holistic end-to-end platform, no one comes close to CoStar. There was a point when LoopNet was a formidable competitor, but we'll talk about it here in a second. they acquired them. So Therco's probably their biggest competitor. I think people probably already understand the value proposition a bit in having a database for commercial real estate. But let's go through sort of an example customer. The, I think, prototypical customer that's easy

to imagine is the real estate broker, the commercial real estate broker. So there's also asset managers and investors and lenders that subscribe but it's easiest to kind of put yourself in the shoes of a broker or an agent so let's say you're a commercial real estate agent and you've got you work with a restaurant operator or a franchisee and that franchisee wants to expand into seattle washington they want to add a new new location somewhere in seattle what you would do so they'd come to you tell you they want to expand go find you know the best deal for them what you would do is get an understanding of what they need so you know how big of a kitchen do you need do you need a drive-through what's your budget all that stuff what's your park

parking space going to be like do you want to have parking um and then you're going to go on to costar you're going to punch in all those filters and parameters and you're going to see It's like a map-based interface, similar to Zillow for people that aren't familiar. You're going to see all the lots that are available that meet those specific parameters. When you click on a property, you're also going to see all the physical specs and any other attributes of a building. You're going to see the lease and occupancy data. You're going to see who are the other current tenants. any sort of market analytics. So for example, you know, you want to put a Jimmy John's

at the bottom of a building. You might want to know how, how many people are in the building, how many, uh, what other businesses are there? What's the occupancy rate, stuff like that. You can also run comps. So you can see like, what's the price per square foot lease rate compared to other buildings in the area, that kind of stuff. So it's a holistic database for commercial real estate. It's exactly what it sounds like. Once you find a property, you would then contact the owner or the landlord, property manager, whatever, and you make an offer.

Think about that process and now think about trying to do it without CoStar. You don't really – you can't. And you could – maybe if you know the area really well and off the top of your mind as an agent, you know every single place that's available for lease at the moment, you might be able to do it. But the reality is you will not be taken seriously as a broker if you don't have a CoStar subscription. You're just lacking the resources that other brokers have. Now, typically, maybe not typically, but oftentimes, these agents or these brokers work for a big parent company like CBRE or JLL, Cushman and Wakefield, I think is one. And those parent companies will just pay for the licenses for their brokers. So that's why it tends to be considered sort of the Bloomberg of real estate. The average subscription license probably costs in the ballpark of $1,000 a month. And you can get volume discounts. You can get discounts if you only need a single market or whatever. But CBRE, for example, will get these massive probably 1,000-seat deals with CoStar where they're getting a volume discount and then they give it to their agents that usually I think are considered like independent contractors.

But nonetheless, I don't know how a broker would operate without a CoStar subscription. I just don't think it's really possible. To illustrate this point, let's look back. If you go back to the great financial crisis and look at the financial results of the business at that time, I've got a revenue chart pulled up here for the last 20 years. In 2009, when the real estate world was falling apart and 100,000 agents dropped their National Association of Realtor Memberships, so the world was collapsing, CoStar's revenue dropped by 1%. It was a 1% contraction when the world around them and their customers' businesses were falling apart. It is probably the last expense you would get rid of before you shut down operations. If you have an office, you'd go home. You'd keep your CoStar subscription. You have to. You drop every other expense, but you can't drop the CoStar subscription. So I think it goes to kind of show how valuable it is to these core customers. investors keep more of what they earn and put more capital to work over time the broker you choose matters interactive brokers member sipc if you care about performance find out why the

best informed investors choose interactive brokers at ibkr.com slash performance again visit ibkr.com slash performance have you been able to pick up if over say you know within the the core business um if a lot of the growth has been new seats or pricing power or are they adding on new features like how exactly has the revenue evolved or is it really just they raise prices on subscriptions and they have a pretty steady customer base pricing power has to make up for the majority of it if you're referring to the just the commercial side and for what it's worth the the business is actually like truly quite diverse now so commercial real estate broadly between loop net and costar i think only accounts for around 45 percent of costar's revenue so

there is like multi-family and residential is becoming a bigger piece but in that commercial real estate industry, I don't have the specific numbers in terms of contract value versus new customer count. But my guess is that customer count has just grown essentially at the same rate as the industry. If the number of real agents and brokers grows by 2% a year, that's, I'm guessing, around what the customer count would grow out maybe a little faster. And then the rest is made up of, yeah, pricing increases. Okay, let's talk first about how the business evolved. But I want to mention, yeah, the nice-looking chart there going back 20 years of data.

Our friends at Fiscal.ai, another great asset, similar to CoStar for the investment world. I won't say a disruptor to Bloomberg, but people can make that connection. it's another great data point for individuals and if you're listening to this you should use our link fiscal.ia slash chit chat check it out check out a free trial and you can get 15% off any paid plan okay co-star group ryan let's keep moving here you mentioned the diversification you mentioned the acquisitions how has the business evolved and kind of for the podcast listeners Try to create a holistic story of how they've kind of – it's really the last 15 years or so post-great financial crisis, how they've evolved into a more diversified player. Yeah. Like I mentioned a little bit ago, commercial real estate now accounts for only about 45% of CoStar's revenue.

It's probably a higher chunk of the earnings, but in terms of revenue, it's no longer the vast majority. I think investors, when they hear CoStar, they still think commercial real estate data and probably because it accounts for the majority of earnings. But also the flagship product, CoStar, is the commercial real estate platform. So there's also the name association there. But they've done a really good job diversifying revenue through acquisition over the last 15 years, like Brett said. They have become – they really are a serial acquirer. And in the early days, the acquisitions were all pretty much supplemental to the existing business. It was all about commercial real estate.

Maybe it was analytics. Maybe there was a research angle. Maybe – really early days, it was about geographic expansion. So right after their IPO in 1998, they bought Jameson Research, which was the leading provider of industrial real estate information in Atlanta and the Dallas-Fort Worth area. That same year, they bought a company called Lease Trends for Midwest and Florida expansion. They bought Comps.com to expand into San Diego, Napier or Napier Realty Advisors to expand into Portland. And the list goes on and on. They just had these one after another geographic data expansions that they would integrate into CoStar and they built out this massive national database that was unlike anything else at the time.

However, they've gone from geographic expansion in the early days to more, I guess, industry expansion as well. So I'll go through a couple of the landmark deals that they've had and then we can talk – we can carve out some time to talk about Homes.com individually. But 2011, they acquired LoopNet. This was not – this was the same industry. It's commercial real estate but it's probably maybe the most meaningful acquisition ever, second behind Apartments.com, which we can talk about in a second. But LoopNet was CoStar's essentially biggest competitor around this time. They had actually spent essentially 10 years prior to this in court fighting each other. CoStar was suing them constantly for data infringement.

But in 2011, they offered, I think it was $860 million in cash and stock. The deal was accepted by LoopNet. And LoopNet, for those that – it's a somewhat similar business in that they're in the same industry, but it's a different model. So a lot of the listings were user-generated on LoopNet. So the real estate agent or owner would put in all the listing information, and it was like this sort of open-source platform where customers could come. And then the agents or the property owners would pay to have like greater visibility on their property. But it was – it skewed more casual users as opposed to professional customers. There were certainly some professionals.

But if I were just wanting to start up my own restaurant or whatever and I didn't have an agent, I could look up available inventory near me on Google and you might find the LoopNet link and it's going to have all these user-generated listings that you can pour through. Anyways, after 10 years of fighting in the courtroom, they acquired LoopNet and it was $860 million in cash and stock, which is about half of CoStar's market cap at the time. And as a part of the deal, CoStar was required by the FTC to spin off LoopNet's stake in Excelligent, which was, I guess, the closest competitor to CoStar. Kind of ironically, they spun off their stake of Acceligent as the FTC required, and then five years later, CoStar sued them again for data infringement, and Acceligent essentially went bankrupt. So they might have been better off not having this required divestiture. but so they kind of have the lawsuit tendencies of a disney or nintendo if anyone's threatening the what they have what they've built they're going to go after them and go after them hard yeah it's almost it's more like getty images almost like yeah and and people hate them for

this like for some reason i've read a whole bunch of articles online that seem kind of like hit pieces against costar and they're like they've sued every small small startup for data infringement it's like yeah they won all those cases because they were just stealing data like it's not they make it sound like they're destroying these smaller competitors but if they're just stealing data it doesn't yeah anyway they've been very litigious throughout their history 2014 they acquired apartments.com for 585 million dollars in cash that was essentially seven times revenue or 21 times EBITDA at the time so not a terrible face multiple but a premium and investors were not ecstatic about it uh it was it wasn't their core business apartments.com

sold subscriptions to property managers and multi-family landlords for essentially same thing sort of as loop net where it's like you get premium property placement when people are looking for apartments so essentially an advertisement sort of an ad model but also subscription um but it was a more competitive industry and management at the time andy florence laid out that they're going to spend aggressively on apartments.com after the acquisition to grow the business and you probably you might remember all those commercials with jeff goldblum where he's talking about out there sometimes yeah well now i i am on dot com i would be curious how much money costar has paid to jeff goldblum over the last decade the yes now it's homes.com but

originally it was apartments.com following the acquisition they initially integrated some of co-stars proprietary data onto apartments.com platform they began taking more photos of properties so i'll talk about that here in a second that that sort of leg of the business model and they acquired a bunch of competing sites apartment finder for rent.com and they spent hundreds of millions on marketing for those goldblum ads fast forward to today and that That business now does more than a billion in revenue, up from 86 million at the time of the acquisition. And importantly, I think this is a nice piece to remember. It's not as cyclical. Apartment rent doesn't go through the same ups and downs of commercial or residential real estate. So the multifamily revenue has been quite consistent and stable for them, which has been very – this was a massive success and I think potentially set a bad precedent because CoStar learned we can acquire these fantastic domains like Apartments.com. We can throw tons and tons of money at marketing.

We can integrate our own data to really juice up the platform. We can use our direct sales team and we can just save any business basically is kind of I think maybe the feeling the company had. So – and in this case, it totally worked. This is the biggest business that they have now on a revenue line. So that acquisition was great. 2021, fast forward seven years, eight years, and they acquired Homes.com for $156 million, which doesn't sound like a whole lot and shouldn't be so controversial, but we'll dive into this more in a second. And they have employed a similar post-acquisition strategy where they are just pouring as much money as they can into expanding the Homes.com brand to essentially compete with Zillow. They're going head-to-head, and I think it's caused Zillow – I don't know how much they've talked about this.

zillow is now investing very aggressively into zillow rentals which i think it's just they're both on the same platform it's not two separate websites or two separate applications but you're going head to head with someone who probably has much more significant mind share among individuals in the united states not talking commercial real estate but individual you know buying or renting a place to live yeah and we're going to spend some more time on homes.com in a second but i'll just mention some of the other businesses that costar owns they own biz by cell i don't know if you know this platform i love i don't love i i've been on there a couple of times you can look at oh would i like to buy this for fifty thousand dollars this terror this terrible business sounds

Yeah, it's basically a small business marketplace for, you know, if you've set up a 10 vending machine operation, you want to sell that business, some other entrepreneur can come along and buy it from you. I can't say it works that well. It's not the best working website. Do you agree? Have you been on there? i've been on there that there was there was like a two month time where i was like maybe i should buy this vending machine operation the uh but yeah it's not it's sort of sub scale i guess you could say so it's just a very different market domain group is another company they own for rent.com they bought matterport i think last year for 1.6 billion that's where that company went yep on that talk about a fallen angel that's a pandemic fallen angel right there yeah land.com is one that they own and a bunch basically a bunch of other data aggregators or

marketplaces you can go onto wikipedia and look through the list i think brett mentioned it's 20 something acquisitions i would guess it's probably closer to 50 if you include all the early ones where it was expanding just the the commercial real estate data services and yeah i think that let's go back to 2011 but still acquisition heavy uh and they're not afraid to pay up any matterport 1.6 billion i know that was a fairly ish successful business on its own and we might not have may we may actually i think you're about to talk about it right now so i don't want to steal your thunder why all right we're going to talk about homes.com after but we need to talk competitive advantages i like to say emerging moats but that's kind of the branding

I like to use. CoStar Group itself. Clearly, the stock has done well over the long term. I looked up even revenue per share. It's up. It's compounding the double digits for a long, long time with phenomenal gross profits. They've chosen how much to invest or not. But clearly, people are giving them money. They can't go anywhere else. There's pricing power there. Where in your mind is the competitive advantage and is it expanding contracting where the risk to the moat take us through all the sort of competitive landscape uh for costar group for you know we can't cover every brand but for the relevant brands today yeah so i believe costar now has has produced or generated more than double digit revenue growth year over year for 50 more than 50

consecutive quarters so yes to kind of illustrate the growth point there yes the very consistent growth the short answer for why is this such a good business at its core is proprietary data and there are sort of there's a number of ways that they get that data and specifically there are some ways that they get data that competitors can't. So I'll go through a few of them. For starters, CoStar employs thousands of researchers, researchers might be sort of a generous term here, whose sole job is to collect data. This is literally call centers where people are reaching out all day to property managers, buyers, sellers, etc, asking for deal prices, lease terms, all that all that data. They're going out and they're collecting it. So of course, someone else can do

that. But for a startup, it's hard to afford 2000 field researchers. The other part here, and this is a big barrier to entry, and it's kind of the crux of a lot of their data infringement cases, is they have a huge team of photographers and videographers. This is actually, I think, really important to focus on. If you're listening to this podcast, you're wondering, what's costar's moat this is kind of where it stems from at this and the next point i'm going to talk about if a costar customer subscribes to the highest tier i think it's the highest tier but whichever one includes the photography package costar will go out and create a bunch of media for your property so that includes high resolution images drone videos 3d mapping with with matterport

Now, they even own a bunch of airplanes that help them get footage of things like skyscrapers. So they'll get video footage, they'll they'll CoStar will hire, I assume they maybe even have pilots on staff to fly around skyscrapers get video footage. the so the customers pay for it the customers pay for costar to send their media team out there for media for for costar to keep the media rights so the costar owns the photos they own the videos basically customers are paying for costar to expand their mo essentially and that's where uh loop net maybe tried to scrape images in 2006 off of costar they tried to copy and paste them over to their own platform or maybe they had um trying to there's a recent example of crexie who was sort of an upstart trying to compete with them that i think had click farms essentially likely in southeast asia that would go in to the costar platform they would crop the images so it

didn't look exactly like it and then they post them to their own platform and costar picked up on it sued them one and probably a short time frame the it's they've done this a number of times and it's always seems to be the crux of their litigation complaints um so that is one thing there's a lot of capital required to have your own team of photographers and videographers and airplanes to get all that rich media footage, which if you're an agent, you want that footage, like you want that content, not just the stats, right? You want to be able to look at the condition of a building. The other part, and I assume this accounts for the majority of the data on their platform, is CoStar's customers are effectively forced to upload their listings

and lease comps to CoStar so other industry players can see them. This has built a massive So let's say I finish a deal. I get that restaurant operator into a space in Seattle. I'm then essentially required to upload the data. Now, Starbucks notably doesn't let their agents do this, but most businesses or agents have to publish all their listing data. What's Starbucks' specific beef? I assume they just don't want competitors seeing what Starbucks pays or why they're going to certain places. I don't know. But I assume it's built into the contracts with some of these bigger agencies like CBRE or Cushman & Wakefield where it's like, we'll give you volume or bigger discounts if you upload your listing data. It's still that give-to-get model. And you think about it like, now, if you're a broker, you need to be where all the listing data is. And all the listing data is uploaded by the users on CoStar. It's a huge network effect. It's not that dissimilar to a social media platform. do you do you want to be on instagram because that's where everyone's posting their content right so um yes i think that that is a powerful element as well and then they also scrape like public records and they've got partnerships with brokerage feeds but those aren't really

proprietary sources so it's not as meaningful in my opinion the thing that i think is sort of beautiful about this business is it's kind of ai proof when you think about the industry for stock market data for example i'll relate this to fiscal shameless plug a lot of business data is in the public domain so financial statements earnings calls stock prices that kind of stuff there are elements of that that data aggregation process that can be automated so there's there's kind of the risk now thanks to modern uh machine learning and ai models that you can automate some of those processes you can't automate sending a plane up and capturing video footage that that rich media content that it really can't be replicated just because we're in an ai world

so i think it's a lot more ai proof than some of the other data businesses that have been struggling lately like i think fax set is one of the businesses that have struggled there's a lot of other data companies that haven't been as resilient as costar so they are uh i think it's not too surprising when you think about how much they spend to get their data why they have been so active suing companies if i'm spending 50 million dollars a year to fly planes to get footage and some other platform is hiring a click farm to steal it you can imagine why they'd want to rigorously protect that and they do yeah and you can just say well someone else can go fly the plane right um the one question i would have here i think can help position how maybe you're thinking

about it and how the listeners can think about the company in the entire real estate space who do you think has the wider moat zillow or costar group costar not close not explain zillow the moat like consumer traffic is not a moat in my opinion um proprietary data is a big moment it's obviously there's a lot of value in having 240 million monthly visitors to your zillow app or whatever like i'm not saying it's bad but zillow gets all their data for the most part by buying it they buy it from a regional uh mls or multiple listing service so that's not proprietary there's nothing stopping homes.com from going out and getting the same data they do that's that's why they when you go to realtor.com you go to

redfin you go to zillow you'll see a lot of the same properties with all the same images because zillow doesn't own those images so on the actual underlying data that they are selling zillow really doesn't have a moat now they've built the best wrapper they've built the prettiest user interface and they own the customer touchpoint primarily through the app but as far as moat goes costar can raise prices at will and zillow is like a really well done middleman in a way and is there a difference between apartments.com and homes.com because with that may i'm trying to play devil's advocate a little bit they're encroaching on Zillow's turf so if more of the revenue comes from that would that be a

shrinking of the moat if they're kind of going you know it's a lower quality business that they're trying to you know acquire and spend their way into yeah I think Zillow investing in Zillow rentals is potentially threatening to apartments.com but I don't know if there's a whole lot of overlap between homes.com and apartments.com and i'll explain why in a second but apartments.com you think about who's the customer for apartments.com well there's the end consumer me i'm not really a customer per se even if i visit apartments.com but i go and i look for apartments near me and there's a couple that are spotlighted okay it's the person that owns the apartments or the property manager paying a subscription fee and maybe some boosted advertising fees

to get their property in front of me as the end customer so so the customer is the property manager with uh residential like homes.com the customer is listing agents for houses which is kind of just a different customer that they're serving so this is why let's dive into homes.com the stock is down almost 70 percent from highs entirely because of this homes.com spending maybe you could say it's been the saspocalypse and everything's re-rating so so they've been included included with it too but it's really homes.com since the acquisition they have been aggressively marketing probably the most aggressive marketing push of all time for real estate uh this homes.com platform and it's it really i mean they really kicked it off in 2024

that's when the spending i think they spent the first couple years making sure all the data was clean and improving the product itself and then now they've just been on a full-blown marketing blitz the world of residential real estate data i just talked about this it's far more competitive than commercial if you look at like if you are zillow or you're redfin and you want to get data about homes in austin you've got to go to i think it's called unlock mls which is managed by which is just the regional mls for austin managed by the austin board of realtors and you pay for that data Again, it's very fragmented, and the data isn't held by any one player like you have with CoStar. So that's the data collection side of things.

CoStar, not that different. Homes.com, similar data aggregation methods. the only caveat there being that they acquired matterport and matterport actually has this big repository of 3d spatial data on a bunch of homes so that might differentiate the platform a little bit but on the monetization side that is where they're trying to change everything so zillow But the way Zillow makes money for the most part is it's a pay-per-lead model. That just means when a buyer inquires about a home, they say, I want this. I'm interested in this or whatever.

Zillow intercepts it and it sells that lead to third-party buyers' agents. That is what homes.com used to do as well. They used to run on this pay-per-lead model. but costar threw that playbook away and has been rolling out this your listing your lead model and they've been saying this and all their advertisements and stuff like that what this means is the listing agent gets a hundred percent of that consumer lead that comes through so effectively homes.com their customer is the listing agent or the seller's agent of a house whereas zillow essentially gets their revenue primarily from the buyer's agent so this really

is they're kind of selling to different customers both businesses need as much consumer traffic as they can get but if i'm a listing agent i can post my property on homes.com or the mls or whatever and whoever comes through that comes directly to me and what i'm paying for is premium placement on the map or uh or sponsored listing if they're scrolling through houses that kind of stuff but the big caveat with all of this and to be clear i think that's i think it's the right choice i think the monetization model kind of remains to be seen but they're taking at it taking this whole market from a different angle i think the pay-per-lead is a little lame, for lack of a better term, that model that Zillow and all the other residential portals

have. I think it's not ideal. But in order to win the market, like in order for this to work for CoStar, they have to get consumer traffic to their website. If consumers don't come to homes.com, there's no incentive for a listing agent to keep having a membership and paying for premium placement. So that is why CoStar has embarked on, Andy Florence called this literally word for word. He said the biggest marketing campaign in real estate history. They have committed to spending essentially more than a billion dollars annually. I think it's changed a little bit since, but more than a billion dollars annually on homes.com marketing. If you look at the sales and marketing expenses for CoStar Group, it has just bloomed in recent years.

we've got a chart from fiscal here so scary looking chart i will say yeah but it's it's i guess good looking it looks what was the combat annual growth here 20 we're going to the same year as the revenue since 2005 um obviously an acceleration in recent years up to 1.56 billion and i have your initial total revenue from 2005 has grown at 17 a year so they've really accelerated that as a higher percentage of revenue mainly for homes.com correct yeah and you can also see the jump in 2015 when they bought apartments.com marketing doubled year over year and it worked out in that case but now since 2022 marketing expenses have gone from 680 million to 1.6 billion so um yeah quite jump surprise surprise investors hate this uh in 2024 costar generated negative

free cash flow for the first time in their history the issue i think that investors are having with all this isn't necessarily just the sheer spend it's that it's hard to tell whether it's working so the credit i would give to costar is that they have they've forced themselves into the conversation they've managed to be homes.com is something that people talk about maybe not talk about but when you talk about like residential portals it's up there they are sort of a legitimate top three player when they bought homes.com in 2021 it was an obscure legacy portal essentially just a domain they had less than three percent traffic share now they are a legitimate top three player they've surpassed realtor.com and i think redfin

in monthly visitors but they peaked i believe the data they reported when they were sort of on a big marketing push was 100 million unique visitors zillow for comparison averages like 240 250 million unique monthly visitors so there's still a second player here and keep in mind zillow is not spending the way that costar is for homes.com so maybe some of this is not going to be recurring traffic the other issue that throws a wrench in all of this is that the residential real estate market is struggling in general it just like rates are rates are up uh homes are pretty much as unaffordable as they've ever been which is muted down yeah yeah so there's gonna be i guess less so they're investing into this weak market and it's sort of an uphill battle

I think the question investors have to ask is, can they win the residential market over Zillow? Do you think that in five years, they could have more monthly visitors on homes.com than Zillow gets right now? And then the second question is if they can't – if they figure out that they are not going to be able to have success and displace Zillow, will they stop spending so aggressively? That's I think probably the two most important questions right now. Yeah, it's fascinating because I think I can sum it up. I still – for myself, I go – I'm going to Zillow. they might want to look for something and even if I'm a renter right now I'm not going to

apartments.com now that could be just the regions I'm in but that's where I think they struggle here long term and maybe they benefited from a decade of Zillow being mismanaged and who knows maybe Zillow will be mismanaged for another

decade that's kind of the only things I have to add at this point I would be curious and I bet this data is out there. How much of Zillow's traffic comes from mobile app versus website visits? Because if they own, you know, if 150 million of their 240 million are visiting through mobile app, it's going to be really hard to win those customers over. like I think homes.com is a great domain but if all this traffic is mobile I don't know

how much it helps them yeah that's fair well I think this means you know we've had a few questions here about the Zillow connection competitive threat I think that means you have to do them for your next fallen angel because the stock is down 83%

from highs Ryan trades at 2.7 times sales maybe i'll convince you to do it i don't know about that one that one's a co-star has a hit i don't love the residential business to begin with because like i said that the there isn't a big data and advantage for any one business but uh at least co-star has these other businesses that are really successful okay let's close things out valuation activist involvement kind of where the stock sits at today and we'll finish things out with always you know what is

your interest in the company so how are you valuing it valuing it and what was the activist campaign so yeah the obviously the homes.com spending has resulted in profitability being essentially nowhere near where people thought it would be and it's people don't know what it's going to look like either so all the dcfs have been sort of thrown out the window from investors this has you know anytime you have a business drop 70 there's not any one ceo with total voting power it's attracted some activist investors uh the two most notable would be third point which is dan lobe and de shaw the focus from both investors more or less was the drain on operating income around homes.com lobe actually mounted a pretty big proxy campaign and and pushed for you know

getting rid of some of the spending and he cited some concerning numbers about uh the expense increases versus the incremental revenue growth but he has eventually he has sort of walked away from this proxy campaign the result of all this activist involvement is that costar they have not completely ceased residential spending they're not saying we're done with homes.com we're going to kill this but they have committed to slashing their annual residential spending by more than 300 million dollars this year and following that up with annual 100 million dollar reductions after so they've revised their 2030 guidance to 2.3 billion dollars in adjusted EBITDA by 2030 2.3 billion let's take a look at how that compares to their 2022 investor day targets so costar

which has historically they've crushed every long-term investor day guidance they've ever issued like they've destroyed the numbers they've done really well but this latest guidance seems like they're gonna have to just ignore that they ever put it out there at their 2022 investor day they get guided for $5 billion in 2027 revenue. So keep in mind, this will be revenue, not this year, but next year. $5 billion in revenue, 40% adjusted EBITDA margins. Their adjusted EBITDA margins is actually fairly useful here. It converts pretty well to free cash flow and stock-based comp isn't too bad. So for reference, like 2019, which was sort of their last real peak year, they reported 36% adjusted EBITDA margins and gap operating margins were 26%. So big

difference, but we're not talking about positive versus negative here. It's generally the right direction. It's looking like CoStar is going to be more around $4 billion in revenue and maybe $1 billion in adjusted EBITDA. So a far cry from what they issued in their 2022 two investor day targets right now costar has an enterprise value of 12.8 billion dollars if you take their numbers at face value and you assume that their recent guidance that they just issued the 35 adjusted ebitda margins is achievable let's say that equates to somewhere like 25 operating margins but i think should be fair they would then be trading at around just under eight times their 2030 operating income closer to less than six times their

adjusted EBITDA for 2030 those multiples are in line with what I usually like I want less than 10 times five year out earnings and they have recently started really pouring money into the buyback my my big thing here and i think this is probably what every investor thinks is what happens with homes.com do why as a consumer me like if i were looking at a home why would i go to homes.com instead of zillow right now the only thing i can think about is homes.com has more 3d spatial mapping because they've acquired matterport so zillow doesn't have that on everyone and i think actually matterport retracted a lot of the like uh 3d spatial mapping that they were selling to zillow and now it's only on homes.com that might be an

advantage but is that enough to win me over i don't know so i i still like it here honestly i think this works out and if homes.com does beat zillow like if they can have more users or visitors in five years this would be a home run but if they don't i the biggest worry is that they're not going to be able to recognize it management won't and they're not going to be able to say we were wrong let's step away from this let's reduce spending that i think is the biggest concern yeah you look at eight times 2030 operating income you know it's not guaranteed to get there uh you look at the operating income today it's close to zero because of this marketing spend right at least i'm looking at the fiscal ai chart here gap operating margin is close to zero

so yeah what do you i'm trying to say is it sounds like it's a watch list stock for you yeah probably but honestly maybe it's a starter position i i do like it here and i think the thing i like the most is that andy florence has built and expanded data businesses for 30 years and he's 40 years almost and he's done an exceptional job with it and he i think he'll be able to tell whether or not the progress is real now i don't know whether or not he'd be able to admit defeat but i think if you get enough pressure from shareholders and your stock keeps dropping for a sustained period of time eventually most executives will be able to

admit defeat so i see this with like meta a lot and a lot of these businesses where they take big swings margins compress and then everyone extrapolates out that margins are going to stay compressed like no one thinks margins can get back to where they were management can always stop like if the pressure gets too big they can rein in the spending and i think usually management teams are willing to after a long enough time period we've seen that with meta meta's done it before amazon started flexing their margins uh i mean yeah until 2026 then everyone's spent everything on big tech to zero i get the point you're making here uh you kind of get gut check and you go it's probably 90 well i think it's a low probability

you lose money here over a five to ten year period only problem is like how much upside do you have if they kind of blow their wad on this homes.com thing it doesn't work out maybe you don't do that well but i i feel like you know again i have a research this company closely you know low percentage chance to lose money probably good fat middle percent chance that you get adequate you know maybe solid multi-bagger returns over a decade and then the upside is you probably get a 10 bagger if things go right they buy back a lot of stock they start gushing cash flow things of that nature yeah when i think about it like i'm sure this is what management thinks about what does it take to get consumers to look at homes.com versus zillow

i mean zillow doesn't have any secret sauce it's they just have a really really well-built user experience so get the user experience right get the user interface right If you can create some sort of proprietary data advantage like with the Matterport, maybe that's helpful. You probably have to do a little more than that realistically to win customers over. But I don't think it's impossible to see homes.com displace Zillow as sort of the leading residential portal. yeah I think I agree with you it's going to be hard to do especially because as I mentioned before Zillow has been mismanaged

I think and is still the leader alright that's going to do it well over an hour here Ryan have you made your choice for next time is it going to be reddit we might have an interview on reddit I don't know so maybe we'd have to revise that if we ever do

have you made the choice if not i guess we can leave it as a mystery for the next few weeks uh whatever i end up doing i'm sticking with the fallen angels theme i don't know exactly what it will be but you can just count on it being yet another fallen angel all right uh thank you everyone for listening thank you to our sponsors interactive brokers and fiscal a i as a reminder we're not financial advisors anything we say on the show is not formal advice or recommendation ryan irony podcast guests may hold security discussed in this podcast may have held them in the past and may buy, sell, or hold them in the future. Thank you, everyone, once again, and we'll see you next time.