CoStar Group, With Close To $2B In Cash On Hand, To Continue To Deliver Strong Performance
Summary
- CSGP has $1.9B in cash on hand.
- CSGP continues its acquisition strategy, acquiring Ten-X for $190 million in cash.
- CSGP’s revenue model is immune to economic cycles.
CoStar Group (NASDAQ: NASDAQ:CSGP) is a provider of commercial real estate information, analytics, and marketing services through its main brands, which include CoStar, LoopNet, Apartments.com, BizBuySell, and LandsofAmerica brands. Though the company supports the real estate industry, its advertising and subscription business models have largely been immune to social distancing rules and the economic slowdown brought on by Covid-19.
Indeed, even when commercial landlords might still be suffering at the moment, CSGP succeeds because real estate investors still need services to source, value, and sell properties. Such investors also need to find buyers. As such, its subscription- and advertising-based models will continue to prove valuable for the company.
According to its Q1 2020 report, LoopNet had its best sales quarter ever and Apartments.com turned in its second-best sales quarter ever.
Strong cash position, on an acquisition streak
CSGP is sitting on over $1.9B in cash, representing an increase of 56% over the same period for 2019.
On May 13, CSGP announced plans to acquire Ten-X for $190 million in cash. Ten-X is a digital platform for brokers to execute transactions and counts all of the top 25 US commercial real estate brokerage firms as its clients.
CSGP intends to integrate the Ten-X digital transaction platform—which includes a digital auction process with online escrow—directly into both LoopNet and CoStar, exposing the properties that brokers are selling on the Ten-X platform to millions of potential global buyers. Ten-X’s current database consists of about 400,000 buyers.
The acquisition of Ten-X seems logical, but it also represents a departure in business model for CSGP. While CSGP has spent over $1B in research, to build and maintain what is considered the largest database of commercial real estate properties—there are 59 data changes per second—CSGP does not handle transactions between buyers and sellers. CSGP makes introductions via its marketplaces, and does sell analytics and accounting software, but there is no handling of funds—until now.
CSGP’s future acquisitions might be in the same digital transaction space, future-proofing its revenue stream and diversifying its revenue models.
Additional acquisition opportunities might exist internationally. For Q1 2020, total revenues from international operations—which include the Realla and ShopProperty brands targeting a UK audience—were $14.4M, representing a 57% increase over the same period for 2019.
International revenues represent an increasing share of total revenues, jumping from 2.8% in Q1 2019 to 3.7% in Q1 2020.
Even before announcing Q1 2020 earnings, CSGP was in acquisition mode. On February 11, the company agreed to acquire RentPath, a network of Internet listing websites including ApartmentGuide.com and Rentals.com, for $588 million in cash. At the time, RentPath was in the Chapter 11 bankruptcy process.
Issuing more common stock, strong institutional ownership
On May 19, CSGP announced a public offering of 2,290,076 shares of its common stock for $1.25B, upsizing and pricing it the next day to $1.5B. Less than one week later, on May 26, the underwriters exercised their option to purchase an additional 343,511 shares at $655 per share.
Why a stock dilution, if the stock is riding high? The cash infusion will most likely be used to fund additional acquisitions.
The largest holders of CSGP stock are T. Rowe Price (11.29%), Vanguard (9.29%), Blackrock (8.09%), and BAMCO/Baron (5.72%).
Total institutional ownership of CSGP stands at 96.96%. This interest is also higher than at almost any other company in the Internet Software/Services industry, which according to NYU Stern School of Business, stands at 46.60%. This higher institutional ownership generally means that there is a strong belief in the company’s management and financial performance.
Based on strong business and financial performance, I predict that the share price of CSGP will hit $800 by January 2021.
This article was written by
Analyst’s Disclosure: I am/we are long CSGP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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