Description

Summary: the NAR settlement is a potential windfall for CSGP’s nascent homes.com business.  This is clustered with rapidly growing homes.com traffic, and homes.com monetization progressing faster-than-expected and tracking above their guidance this year.  CSGP is trading in-line with historical valuation on just the core business alone, leaving behind a cheap option on the homes.com network.

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Tychus posted on CSGP last July.  I would start there, including a healthy back-and-forth in the messages.

There have been material positive developments since that time, for which the stock is flat relative to the mkt.

In rough order of materiality:

1.   The NAR Settlement

This is, IMO, a BFD.  And the best plausible outcome for CSGP and homes.com.  See recent posts/conversations on VIC re: EXPI, Z, COMP, etc. for a fulsome discussion of the potential ramifications.  

My own view: unbundling of the buy-side commission, including requiring buyers to contract with buy-side brokers and explicitly lay out buying agent compensation, will lead to clear erosion of the buy-side commission = the death knell for the legacy US portal model of monetizing buyer leads (Zillow).

The 5-6% commission cartel will break.  This price was enabled by NAR, through their control of the MLS’s, and listing rules therein. 

Many buyers may choose not to work with a buying broker, at all, or in a much more limited capacity. That relationship will now be a direct/negotiated/contracted one, funded out of the pocket of the buyer. Many international markets have no buy-side brokers or a diminished one, which is the likely next steady-state in the US.

ZG’s model of monetizing the buy-side broker will die. The most direct/physical driver of that = buyers have to sign an economic contract with buy-side brokers. Gone are the days of clicking on a buyers’ agent link on a Zillow listing.

ZG will have to pivot to monetizing listings/sell-side. Can they do that quickly, and make it to the other side?  History says it is hard to cannibalize oneself.

Homes.com starts with the right model for this world = monetizing sellers/listings.

But why listen to me, when you can hear it directly from the horse’s mouth, from someone on the other side of the trade.  Here was Zillow co-founder Spencer Rascoff in July 2023 (paraphrasing/quoting a buyside call he held with KBW):

If regulatory/legal unbundling of buy/sell-side agent commissions happens, “everything gets thrown out the window”. This would be “a gift from heaven” for Costar. They start with the right model, for that world. While Z would have $1.5bn in revs at risk in an upside-down model, and would have to reinvent themselves. A ban on commission sharing, were it to happen, would be “seismic”.

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A further tail outcome from the NAR settlement, one that’s not necessary to the CSGP bull case: this could break the MLS monopoly on listings. The MLS’s lose significant utility, here. They are 1) no longer a mechanism for commission-sharing, 2) agents are no longer required to put all their listings on the MLS’s. This opens the door to replacing the patchwork network of MLS’s, with a private/centralized inventory database (homes.com, Zillow.com, etc.). Which is what we see in UK/Europe/AUS.

Remember, brokers pay $20-50/mo to access their local MLS, and it costs several hundred $ to list a property on an MLS. MLS’s aren’t free.

The holy grail = MLS’s die, lose inventory share to private networks, and a monopoly private inventory pool emerges (at homes.com, Zillow, or elswhwere).  Given the MLS’s start with 100% of the inventory, that will be a hard network to unseat and I take the under. But it is now possible, in a way it wasn’t before.

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The bull case, for the status quo, is [things will change slowly and it might not be that bad].

The bull case, for change, is that [the key driver of the US’ wonky commission structure is now gone, and the market will converge to structures we see internationally].

I think there is significant asymmetry here.  This is anywhere from ‘good’ to ‘spectacular’ for CSGP and homes.com.

The NAR settlement may not be the final straw either.  The DOJ is heavily involved, with a known open investigation.  They may impose additional changes, beyond what the NAR has already agreed to.

2.   Homes.com traffic and monetization push

CSGP will invest ~$1bn (!) this year in homes.com.  Up from ~$500m last year.  The early spend was on content.  Their neighborhood content is already far superior to Zillow’s, IMO.  This next leg of spend, is marketing (brand + SEM).  Note that they have $4+bn of net cash on the BS, and significantly + FCF even after the homes.com spend.

Yes, CSGP is buying homes.com traffic.  It is paid, and not organic.  That makes the spike in traffic since they bought the asset, and subsequent to the 2024 super-bowl marketing push, potentially ephemeral.  In ~1yr, CSGP took homes.com from ~0, to the #2 visited home portal behind Zillow.  And they bought it.

But this isn’t CSGP’s first rodeo.  They did the same with apartments.com, built a brand, and sustained the traffic, which over time became organic.  Today, 85% of apartments.com traffic is organic.

Monetization of that traffic is just beginning.  Remember, CSGP is monetizing listing brokers, not the buy-side.

RBC is providing real-time weekly paying agent count from their web scrape of homes.com.  Paid agents increased from 0 at the end of Jan2024, to 800 as of 2/20 shortly following the SB ad blitz, to 5.7k on 3/25.  Implies ARR up to $35-40m of ARR vs guidance of [$100m] by YE 2024.  Also implies that bookings are accelerating, 1.5mo removed from the SB ad blitz.

With the caveat that this is a web scrape, and not source-of-truth, the implication is that homes.com guide for [$100m] YE ARR is looking conservative with CSGP currently booking $5+m in net new ARR/week.

This is clustered with the NAR settlement above, and there's a good chance we see the market conflate the two.  Notwithstanding the fact that the NAR changes don’t go into effect until July 2024.

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We could also see CSGP take another swing at acquiring realtor.com.  They walked away from the deal last year on price.  Realtor.com is in trouble, with the NAR settlement, and CSGP’s marketing bonanza.  It would not be a surprise to see CSGP get the asset, at a discount.

IMO, realtor.com would be a homerun for their homes.com buildout, adding ~60m eyeballs to the network.

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Z and realtor.com make ~$7/MAU in revs.  The international peers, with monopolies + better biz models make $20-30+/MAU.

If we let our imagination wander, which is what the market oft does if things ‘start going right’, one can imagine a world in which homes.com is as big as the rest of the legacy CSGP biz = 100m+ MAUs, monetization closer to int’l peers.

3.   International push

CSGP acquired OnTheMarket (OTMP LN) in late 2023 for GBP100m.  OTMP is the #3 listings site in the UK, behind RMV/L and Zoopla (owned by PE).  At acquisition, they had ~70% of RMV/L listings and 29% of the traffic. They have no shot to compete, on their own.  Their revenue is ‘the good kind’ = agent subscriptions, in which they pay-to-list/premiumize listings.

In Andy’s words: “ONTMP charges 1/10 what Rightmove does. And that’s before Rightmove’s plans to raise pricing 7%/yr over the next 5 years while maintaining at least a 70% profit margin. You simply cannot make this stuff up, but you have to love it.”

Note, GBP100m = 0.4% of CSGP’s EV, and they have $5.2bn in cash. The size of the deal itself is a rounding error. The question is, what are they going to do with it?

Andy has told us.  Europe is their next frontier, which CSGP will tackle with their historical playbook: buying tier2 listings assets, and 1) invest in content/website performance, 2) throw ad dollars at traffic.

That playbook was wildly successful with apartments.com, in part because there was no clear #1, the market was fragmented, and they had by far the deepest pockets.  International will be harder.  There are clear #1’s, with deeper pockets.

A possible next target is Germany, where KKR owns the #2 asset behind Scout24.  One has to imagine that asset is for sale, and CSGP would want.

I am less optimistic re: their International listings push, than I am with homes.com in the US.  Europe/UK is owned by dominant established players, with reasonably deep pockets.

But I also think: 1) CSGP doesn’t need International resi to be successful, 2) there’s + asymmetry if it is.

4.   We’re another 8 months through the CRE cycle, and now almost 2yrs removed from the top

As noted in Heffer’s well-timed late-2020 short pitch, the core suite business is exposed to the CRE cycle.  Although this exposure is lower than in history, with just ~1/3 of this biz selling to brokers, down from 90+% at the time of CSGP IPO.  Also note, that over half of those brokers’ activity comes from leasing as opposed to sales.

Suite organic growth has slowed from mid-teens at the peak of CPI-linked price increases, to [+7-8] in 2024E.  Andy argues 2024 will be the bottom for the CRE cycle.  Maybe.  But, we are now closer to that bottom than we once were.  CRE transactions were -50% in 2023, and at the lowest level since 2013.  This will be an eventual tailwind, to CSGP’s core suite business.

The Business 

I’m not going to rehash the whole biz here.  Plenty of good data/summaries in prior VIC posts and the 10-K.

How we think about it: 40% core suite + adjacencies, 60% online property marketplaces.

The former is ‘the Bloomberg of CRE’.  Others have tried to emulate and failed.  This is a monopoly, and CSGP protects it with fervor (see their forcing Xceligent into BK).  The moat is a combination of software engrained in customer workflows + proprietary data/history that nobody can replicate.

The latter is mostly apartments.com today (#1 apartment portal), with commercial (Loopnet, Tenx) still in its relative infancy.  And homes.com the big wildcard, where we see significant prospective upside, as detailed above.

Valuation

This is Quality Secular Growth, and it trades as such.  If you are inimical to paying 40+ PE for an asset—as CSGP and other ‘quality growth’ winners have traded for a decade+—this isn’t for you.  That’s a foundational debate, for another forum.

With that said, headline valuation, is the wrong metric.  I think the right valuation framing, is ‘what are you paying for the core ex-homes.com?’  And then, separately, what is homes.com worth? 

On my math and numbers, CSGP trades 42x this year's core earnings, excluding the losses from homes.com.  The core business has an EBITDA margin in excess of 40+%, is growing +LDD organically, with margin expansion.  I think value creation (earnings growth) will be 15+% for years to come.    Everyone has their own method of dealing with the growth vs valuation debate.  One such way, is to answer, [what is the PE in 5yrs?].  I think I’m buying CSGP below 20x their year 5 earnings.  And in 5 years, I think CSGP will have as-good-or-stronger of a core business, as they have today.

Empirically, 42x is: 1) towards the LE of CSGP’s historical absolute multiple, and 2) towards the LE of their historical relative premium vs SPX.

That’s all before assigning any value to homes.com.

What is homes.com worth?  The TAM is at least as big as the core commercial one.  Zillow has a flawed model relative to int’l peers.  CSGP has a shot at creating a better one.  Maybe it works.

They will have spent ~$1.5bn on homes.com, by the end of this year.  The 42x above assumes that’s ultimately worth 0. Andy is among the best capital allocators we’ve seen.  He’s not going to throw good $ after bad, perpetually, if homes.com is a bust.

We’ve seen this video tape many times with Costar.  They took apartments.com from 0 to $1bn in revs in 10yrs.  Every time they leaned into investing in apartments, the market hated it, for a short period of time.  Looking back, with the benefit of hindsight, those investments were homeruns.

In short, I think you get to own the core business here, cheapish to history (but certainly not outright ‘cheap’…if that’s your thing).  And you aren’t paying much/anything for homes.com.

Other considerations

Andy is an all-star.  Probably the all-time great among proptech CEOs.  That’s despite having never owned much stock.  We’ve spent a lot of time with him…he is simply wired to aggressively compete and win.  I encourage anyone looking at CSGP to meet with Andy, and also speak with his competitors/peers about him.

The balance sheet is perfect, with more than $4bn in net cash.  Inclusive of a lengthy track record of accretive M&A without taking on debt.

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Disclaimer:

This presentation is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author's commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate. At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security.

Catalyst

1. NAR settlement implemented starting July 2024 drives the home portal market towards homes.com's model and away from incumbents.

2. Homes.com monetization surpasses initial guidance for 2024...bookings appear to be tracking well ahead through March.