Description

I recommend considering a long position in CoStar Group (ticker CSGP), whose current stock price stands at $84 per share (experiencing a 8% drop following yesterday's earnings report), with a market cap of $34 billion. This presents an excellent opportunity to invest in a long-term compounder that holds a dominant position as a data provider in the real estate industry.

Established in 1987, CoStar Group is a renowned provider of online real estate marketplaces, information, and analytics in the US and UK. The company offers a comprehensive platform with standardized information, analytics, and online marketplace services for both commercial and residential properties. CoStar's core strategy revolves around empowering real estate professionals and consumers with critical knowledge, facilitating efficient real estate transactions. Their extensive range of services provides comprehensive data on properties, leases, sales, tenants, and market trends, catering to a diverse audience within the real estate sector.

Through strategic acquisitions such as Homes.com, BureauxLocaux, and Business Immo, CoStar has expanded its service offerings, augmenting its position as a market leader. The company's unparalleled database is a result of meticulous effort, with each property hosting hundreds of items such as pictures, floor plans, transaction history, sales comps, ownership details, zoning information, tax assessments, deeds, and more. CoStar diligently maintains and updates this vast database daily, covering approximately seven million properties. This monumental task is achieved through the dedication of thousands of full-time employees conducting millions of interviews with industry participants and physically inspecting numerous properties. Furthermore, the data is rigorously validated using a comprehensive suite of data analysis software.

Over its 36 years of operation and several acquisitions, CoStar has accumulated an extensive portfolio of proprietary datasets, cementing its position as the world's largest proprietary real estate database. CoStar's data has become an integral part of the workflows and in-house datasets of brokers, REITs, investors, property managers, governments, and banks, underscoring its indispensability within the real estate industry.

With its robust data foundation and dominant market presence, CoStar Group is well-positioned for sustained growth and continued success in the ever-evolving real estate landscape.

CoStar serves as a comprehensive subscription-based integrated platform, offering commercial real estate intelligence to industry professionals. This platform is a valuable resource, providing in-depth information on various property types, including office, industrial, retail, multifamily, hospitality, and student housing. Users gain access to a wealth of data, encompassing properties for sale, lease availability, tenants, industry professionals, industry news, and market status. CoStar's offerings extend to lease analysis, risk management, and hospitality benchmarking capabilities, delivering a complete suite of tools to empower decision-making.

Within the CoStar platform, users can leverage a range of powerful tools, enhancing their real estate endeavors:

1. Properties: This feature presents a comprehensive inventory of commercial properties, complete with for-lease and for-sale listings, historical data, property analytics, photographs, demographics, maps, and floor plans. It enables professionals to identify available spaces, evaluate opportunities, assess asset values, and analyze prevailing market conditions effectively.

2. Leasing: Subscribers gain access to robust lease transaction data and sophisticated software tools, facilitating lease management, in-depth lease analysis, cash flow evaluation, and the comparison of lease alternatives.

3. Sales: CoStar boasts a vast database of commercial real estate sales transactions, empowering professionals to conduct in-depth research on property comparables, identify market trends, and support property valuations with confidence.

4. Tenants: Detailed commercial real estate-related tenant information is made readily available through a searchable database, allowing professionals to target and engage prospective clients more effectively.

5. Market Analytics: Users can access and generate insightful reports on aggregated market trends, leasing activities, vacancy rates, rental rates, construction insights, investment sales activities, and economic conditions influencing commercial real estate markets.

6. Public Record: This feature provides convenient access to a searchable database of commercially-zoned parcels in the United States, delivering essential property attributes, sale transactions, loan details, liens, and tax assessment information.

7. Lender: CoStar offers specialized tools tailored to lenders, facilitating effective loan portfolio and risk management. Lenders can utilize features such as portfolio surveillance, concentration risk monitoring, stress testing, expected credit loss modeling, and loan origination support.

Through its diverse and robust array of tools, CoStar equips real estate professionals with the essential data and analytics required to thrive in the competitive commercial real estate market. Its subscription-based model ensures that subscribers have ongoing access to the latest and most relevant information, contributing to informed decision-making and a competitive edge in the industry.

Investment Points:

1. CoStar's Unrivaled Data Suite: CoStar Group boasts an indispensable data suite that has become a cornerstone for all players in the real estate industry. With a remarkable customer annual retention rate of 90%-95%, and an even more impressive rate of over 98% for the 5-year plus cohorts, the company's data offerings have solidified its position as an essential resource. Even during challenging times like the COVID pandemic, CoStar's data suite proved its resilience, as evidenced by STR, an aggregator of hotel data, which retained 97% of its clients and achieved 5% revenue growth YoY in 2020 Q4 despite the hotel industry's struggles. The comprehensive database, meticulously curated and analyzed by thousands of dedicated employees, provides unparalleled insights into market trends, property valuations, and transaction history. CoStar's dominance in the industry is so significant that brokers not subscribing to its data suite risk having their legitimacy questioned.

2. Good acquisition skill case in point: LoopNet: CoStar's acquisition of LoopNet in 2012 marked a pivotal moment in the company's trajectory. Although the acquisition faced extensive FTC review, CoStar navigated it successfully by agreeing to sell LoopNet's ownership stake in Xceligent. However, a lesser-known but crucial aspect of the acquisition was the under-monetization of LoopNet's data services before the deal. About 50% of LoopNet's revenue came from data services that directly competed with CoStar's offerings. After taking control, CoStar integrated LoopNet's database, leading to cost reductions in data maintenance and enabling upselling of data services to LoopNet clients.

3. Flywheel Effect of LoopNet Acquisition: An intriguing aspect of the LoopNet acquisition is the flywheel effect it has on CoStar's data business. Much like the insurance industry feeds claims data to Verisk for free, which Verisk then sells back to insurers at a substantial mark-up, brokers listing their properties on LoopNet are inadvertently feeding data on hundreds of thousands of properties into CoStar's database. This significantly lowers CoStar's data collection costs, and the company can then further capitalize on this data by selling it back to brokers at premium rates. Several of CoStar's other acquisitions also share this advantageous characteristic.

4. Success of Apartments.com Turnaround: CoStar's acquisition of apartments.com, which was once considered a second-rate player, has turned into a resounding success through a textbook turnaround strategy. Prior to the acquisition, apartments.com was mostly milked for cash by its previous owners. Upon taking control, CoStar made substantial investments, including marketing campaigns and enabling the execution of lease contracts and rental payments on the platform. These efforts resulted in a dramatic increase in client leads, allowing CoStar to capitalize on the value it helped create by charging higher fees for premium tiers. As a result, apartments.com has emerged as a dominant multifamily marketplace, capturing over 50% market share for properties with 100+ units.

5. Expansion into Residential Real Estate: CoStar's strategic acquisitions of HomeSnap and Homes.com demonstrate the company's ambition to penetrate the residential real estate market. Building on the success of its apartments.com acquisition and turnaround experience, CoStar is well-positioned to replicate this triumph in the residential space, driving robust growth in the years ahead. By leveraging its proven strategies and expertise, CoStar can effectively capture market share and establish a dominant position in residential real estate, complementing its already established stronghold in the commercial sector.

6. Proven Leadership and Execution: A significant driver of CoStar's success lies in the visionary leadership of its founder and CEO, Andrew Florance. Over 36 years, he transformed CoStar from a dorm room project into a thriving $33 billion enterprise. Andrew's adept understanding of both business logic and regulatory dynamics has enabled CoStar to achieve consistent organic and inorganic growth. His leadership and strategic decision-making make him the true "Co Star" of the show, instilling confidence in the company's ability to continue its impressive trajectory.

7. Monopoly indeed, but no one cares: CoStar's dominance in the real estate industry is nothing short of a true monopoly. During the challenging times of the COVID pandemic, the company faced 37% employee attrition, yet retained an impressive 97%+ of its customers. CoStar's vast customer base comprises brokers, real estate professionals, bankers, and more, creating a highly fragmented customer landscape with no single customer accounting for more than 5% of revenue. This monopoly-like position grants CoStar significant pricing power, enabling the extraction of increasing value from the real estate industry. CoStar has already won many FTC battles; Regulatory intervention is highly unlikely: .after all, which politician cares about some real estate firms complaining about data fee being a little too expensive?

8. Road less traveled by VICers? Value investors usually don't visit names like CSGP, because it's an obvious monopoly and the market is pricing it as such, so the only surprise possible is negative: when regulators finally step in to right its monopolistic business practices and crashes the stock price with it. In fact, the only CSGP writeup on VIC was a short thesis back in 20201129 based on this argument. However, the author wants to advance the opposite argument here: CSGP has insurmountable mout, was growing consistently in the past, has room to grow in the future; and it very likely will keep growing at mid-teems rate over the next five years with margin expansion to boost. With 40x P/E 2028 the price will compound at 15%+ over the next five years.

9. Macro likely to be tailwind: Despite SPY being near record high, the macro environment is likely to provide a tailwind for CoStar over the next few years. Housing's recession has already happened, and might be behind us now: https://www.wsj.com/articles/housings-recession-already-happened-26bbb505 Interest rate likely will start coming down in the next 24 months which will further boost real estate market activities, etc.

Overall, I think CSGP will provide mid-teens return over the next few years with minimum business risk.

Risk 1: Mr Market stops pricing money machines like CSGP, V, MA, VRSK like it does now.

Risk 2: CoStar starts to do stupid acquisitions that don't leverage its core data business.

Catalyst

growth in the residential RE market; acquisitions that further leverage and strengthen the core data business; fee hikes