CoStar Group, Inc. (CSGP)

How it makes money

Most revenue comes from recurring subscriptions that commercial real estate professionals renew year after year to keep access to CoStar's data, which makes that part of the business predictable and high-margin. Homes.com and Apartments.com instead earn money mainly from advertising paid by agents and landlords wanting more visibility, a newer and more competitive model that CoStar has been spending heavily to build into a leading consumer destination for home shoppers.

Revenue by segment

CoStar built its commercial real estate database over decades by sending researchers to physically verify property data, which is expensive and slow for a rival to replicate, and brokers who rely on it daily are reluctant to give up a tool their workflow is built around. That advantage is strongest in CoStar Suite; it does not yet extend to Homes.com, which is still fighting an established leader.

Subscription revenue from commercial real estate professionals is fairly sticky and holds up reasonably well through the cycle, since brokers need data whether the market is up or down. Advertising-funded residential revenue is more exposed to the health of the housing market and to how much agents and landlords are willing to spend to attract renters and buyers.

Key risks

• Homes.com investment losses — CoStar has been spending heavily to build Homes.com into a leading consumer destination, and management has indicated the business may not reach positive profitability for several more years.
• Competition from Zillow and Google — Homes.com and Apartments.com compete against Zillow and potentially Google for consumer attention, and restricted or more expensive access to listing data could raise CoStar's customer acquisition costs.
• Acquisition integration — CoStar has grown partly through a series of acquisitions, including Matterport and Domain, and integrating each new business carries execution risk and can strain management attention.
• Real estate market cyclicality — A slowdown in commercial or residential real estate activity would reduce the transaction volumes and advertising spend that support parts of CoStar's revenue.