CoStar Group Offers An Excellent Long-Term Investing Opportunity
Summary
- CoStar Group is a long-term revenue growth play in the real estate listing market.
- The company’s revenue is expected to grow at a CAGR of low-double digits in the next five years.
- I believe long-term investors can buy CoStar Group’s shares during pullbacks for maximizing their profit.
ArLawKa AungTun
CoStar Group, Inc. (NASDAQ:CSGP) is a medium-growth real estate listings firm. Its revenue is expected to grow steadily in the long term at a CAGR of 12% driven by the company's unique advantages over competitor products. I believe the company's subscription-based business model will drive revenue growth on a sustainable basis. Long-term investors can buy the company's shares on significant pullbacks to maximize profit.
CoStar offers subscription-based integrated platform for commercial real estate intelligence. The company provides information about office, multifamily, industrial, retail, hospitality, and student housing properties. Its flagship business is Apartments.com. The company offers analytics service to its customers.
Growth Driver
CoStar's growth driver is the company's real estate listing business, which includes commercial real estate and residential apartments. The company beats its competitors by providing its customers more information, analytics and marketing services compared to its competitors. The company also provides the world's most comprehensive commercial real estate database and largest commercial real estate research facility. These are the reasons why the company's revenue growth is rising steadily. I expect the company's revenue will continue to rise in the coming years due to these reasons.
The company offers its search service to help renters find the information that meets their needs. The company's PolygonTM search tool offers a unique way to allow renters specifically define the area in which they want to find an apartment. Due to this, its search facility beats competitor products and strengthens the company's long-term top-line generating source.
Competition
CoStar conducts its business in a fiercely competitive environment. CoStar's competitors include Experian (OTCQX:EXPGY), Verisk Analytics (VRSK), Wolters Kluwer (OTCPK:WTKWY), Equifax (EFX), and SGS SA (OTCPK:SGSOY). The company competes on the basis of the quality of services offered, superior listing pattern, and price.
CoStar's primary competitive advantage is that its standardized platform of information, analytics and online marketplace services offers its customers interaction- and transaction-related services through which they can efficiently access and exchange accurate and standardized real estate-related information. Using this platform, CoStar's customers get benefitted in a unique way, which helps the company grow revenue in a sustainable manner. The company's another competitive advantage is that its information technology team implements technologies and systems that introduce efficient workflows and controls designed to increase the production capacity of its research teams, which in turn results in increased revenue growth for the company.
Third Quarter 2022 Results
The company's third quarter 2022 revenue came in at $557 million, an increase of 12% year-over-year, compared to revenue of $499 million in the year-ago period. Non-GAAP net income for the third quarter of 2022 was $118 million or $0.30 per diluted share, an increase of 19% year-over-year. Net new bookings for the quarter came in at $76 million, up 62% year-over-year.
The company delivered excellent results for the third quarter of 2022. Topline increased driven by Apartments.com sales growth and impressive growth in new bookings. Bottom line increased, driven by improved cost-control measures and significant "unique visitors" growth. The company's results in the third quarter demonstrated strength in its products and resiliency in its subscription-based business model. I expect this trend will continue to repeat in the coming quarters, which would result in growing top- and bottom-line for the company.
CoStar's flagship business Apartments.com posted great revenue growth in the third quarter. The website posted highest sales month ever in September this year, and second-highest sales quarter. Year-to-date, Apartments.com delivered a rise in net new sales, which amounts to 192% over the prior year. I expect Apartments.com will continue to drive CoStar's revenue growth in a significant way driven by tight multifamily market conditions, which I expect will gradually become a strong tailwind.
Valuation
The company's peers include Experian, Verisk Analytics, Wolters Kluwer, Equifax, and SGS SA.
CSGP | EXPGY | VRSK | WTKWY | EFX | SGSOY | |
P/E Non-GAAP (FY1) | 61.88 | 25.59 | 31.87 | 25.59 | 25.37 | 23.59 |
Price/Sales (TTM) | 14.35 | 4.86 | 9.09 | 5.17 | 4.51 | 2.49 |
Price/Cash Flow (TTM) | 70.66 | 17.20 | 27.41 | 19.00 | 28.65 | 15.03 |
(Data Source: Seeking Alpha)
CoStar's valuation is rich compared to its peers. The company's balance sheet consists of cash and equivalents of $4,774.5 million and total debt of $1,107.8 million. The company is expensively valued since it offers its customers real estate-related services which are not only advanced but ahead of time as well. The company's analytics service is sophisticated compared to its competitors' similar services. Since the company's valuation is rich, and lukewarm macroeconomic conditions that's weakening stocks in general, investors can wait for a significant pullback for buying CoStar's stock.
In the last five years, the company's revenue has grown at a CAGR of 17%. Assuming the company's revenue will grow at a CAGR of 12% in the next five years, I will find out the company's long-term share price. The company's trailing 12-month revenue is $2,115.80 million, and at a CAGR of 12%, the company's end-2027 revenue will be $3,728.00 million, or $9.17 per share. In the last one year, the company's shares have traded between the price to sales multiples of 11x and 17x, and I expect in the next five years the company's price to sales multiple will touch a high of around 14x driven by the company's unique business model. Applying a price to sales multiple of 14x on the company's end-2027 revenue per share, I get the company's end-2027 share price as $128.38.
Risks
Given the downturn in the real estate market in recent months, the company's real estate listing business could suffer from less customer growth in the longer term. This could lead to decreased revenue growth for the company. I believe this could become a deciding factor for the company's long-term share price.
Since CoStar is a company related to real estate construction, it could suffer from problems related to inflated cost in the real estate market. The materials required for constructing buildings are becoming expensive day by day. This is resulting in expansion of input cost for the companies that construct commercial buildings and residential apartments. As a result, these companies are suffering from shrinking income phenomenon, which in turn could negatively affect CoStar's top-line and bottom-line growth in the coming years.
Conclusion
Expectedly, CoStar's revenue will grow at a stunning rate in the long term. I believe this will create long-term investing opportunity for growth-oriented investors. The company's shares can be purchased during pullbacks for profit from the company's unique business model leading to long-term revenue and profitability growth.
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