transcript

Speaker 1:
[00:00] You're listening to TIP.

Speaker 2:
[00:03] Think about every commercial building in America, every office tower, every strip mall, every apartment complex, every warehouse. Now imagine that for 40 years, there's one company that has had people physically visiting each one of those properties, recording what they see, photographing the buildings and compiling the most comprehensive database to digitalize commercial real estate in the world.

Speaker 3:
[00:25] That actually sounds incredibly boring, but also incredibly valuable.

Speaker 2:
[00:29] It's both. It's so boring that most investors have probably never heard of CoStar Group. And yet, it's a company that just reported its 59th consecutive quarter of double-digit revenue growth through COVID and through the 2022 rate hike cycle that crushed commercial real estate and transaction volumes.

Speaker 3:
[00:47] Despite that extraordinary track record, though, the stock has gone basically nowhere for five years, while the S&P is up close to 100%.

Speaker 1:
[00:59] Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investment in the securities discussed. Now for your hosts, Shawn O'Malley and Daniel Mahncke.

Speaker 3:
[01:45] I have never worked in commercial real estate, and I think it's fair to say that neither of us invest much into real estate. So when you told me, Shawn, that today's pitch was CoStar, my first reaction was, what even is that? And the name kind of sounded familiar to me, but I actually had no idea how big the business actually is, what exactly they do, and apparently, it is quite the battleground stock these days.

Speaker 2:
[02:06] Well, you're not alone on that, because despite being close to a $30 billion company with revenues north of $3 billion a year, CoStar is just generally not that well understood by most investors. And it's a business that's enjoyed nearly 60 consecutive quarters of double-digit revenue growth, which is just astounding. And then you have $2 billion in cash net of debt, and then nearly 50% profit margins on its core business. So things look very good, and the company operates in this niche that's invisible to consumers like you and I, and until recently, it was primarily a B2B data and analytics provider. A little bit of jargon there, and as you know, probably not the kind of thing that is always coming up at dinner parties, unless you have a bunch of commercial real estate brokers dining together.

Speaker 3:
[02:50] Well, from what you told me though, the focus or the emphasis here is on until recently, because they do have quite a lot of side projects by now that also target other audiences and target customers, right?

Speaker 2:
[03:03] They do, and that's the big story with CoStar right now. And the reason it's generating so much controversy is that over the last five years, they have been pouring enormous amounts of money into trying to crack into the residential real estate market. So they've invested something like $5 billion into their own consumer facing real estate website called homes.com to compete directly with Zillow and also realtor.com. And I had never heard of it until they started running this blitz of Super Bowl ads with Dan Levy.

Speaker 3:
[03:33] Well, that's probably not a good sign because Shawn just bought a house. So I assume when I ask you if you scrolled Zillow or homes.com, the answer is likely Zillow.

Speaker 2:
[03:41] I wish I could say homes.com though. It was Zillow. I'm guilty as charged. It's not because I have any special loyalty to Zillow, but for a long time, they've definitely had the best name recognition. And honestly, casually scrolling Zillow and maybe now homes.com, it's just fun, right? You're just, you're looking at all these interesting properties. And doing that kind of became a habit for my wife and I. And we'd actually have these like date nights where we'd pull up Zillow on the TV and then just scroll through listings, sort of kind of half seriously fantasizing about what our lives would look like in all these different homes. And then we actually found one we loved. And now I do have a significant investment in real estate, I think, to say the least. But from what I can tell from a user perspective, it is hard to meaningfully articulate any differences between Zillow and homes.com. But on the back end, there are some very big differences in how their business models work. And CoStar is hoping that that will be what enables homes.com to win long term. But in the meantime, they're just investing tons and tons and tons of money in trying to create a brand around this new product.

Speaker 3:
[04:50] $5 billion for a company with $30 billion in revenue seems like quite a lot. And I'm assuming here that this is probably why this stock also has underperformed. From what I understand, they basically have this very profitable core business, which is probably why 90% of investors bought into this stock. And now, instead of paying back the profits of that business to investors, they are pouring billions of dollars into this new project, which up until now has not been totally successful.

Speaker 2:
[05:17] Dramatically underperformed is probably the way to put it. In the last five years, where you have the S&P 500 up around 70%, CoStar stock has been down more than 10%. And then just in the last year, you've seen something like a 50% sell-off at the time of recording and CoStar. And so one of the most prominent activist investors in the world, Third Point, run by Dan Loeb, published an open letter in January, 2026, essentially calling for a board overhaul and demanding the company pull back on residential spending. So we have a lot to get through today, I think. It might be a long episode.

Speaker 3:
[05:55] Sometimes Sean and I have a quick talk about the company that we will cover on the show while still in the research process. And if that's the case, it's mostly one of those lines like, hey, this company is actually not as great as I initially thought, because there's this or that angle that makes it interesting, but the overall company is not as great as I initially thought when I chose it for the upcoming episode. An episode where that happened, for example, is Snapchat. This time though, Shawn actually texted me and said, CoStar is actually a much more interesting business than I initially thought. You didn't give me many details, but that was kind of intriguing to me. To be honest, right now, CoStar certainly still looks like a battleground stock as you introduced it. I'm kind of interested in what you still have for me and why this is actually such a good opportunity. What are the core questions that we'll have to answer today?

Speaker 2:
[06:41] I think there's three big questions. Firstly, is the core commercial real estate data business, is it as special as it looks from the outside and based on the way people talk about it? People usually frame their B2B data service as being like the Bloomberg Terminal of commercial real estate and one of the things I wanted to look into is to try and understand how true that is. Secondly, does all they're spending on a residential property bet, kind of beyond their circle of competency in commercial real estate with homes.com, does that make strategic sense given all the pain they're feeling in the short term? Thirdly, is management's judgment trustworthy, given what they've been able to deliver return-wise historically to shareholders? Because this is a company that has issued a lot of equity over the years. That was one of the things we were talking about before the call. There's been a lot of dilution over time, and it doesn't necessarily mean that it's been value destructive. It's not coming as a stock-based cop, but they do it to raise capital for the business, and they do it to make and enable acquisitions. It's really, really important here that we have a good grasp on the quality of the capital allocation decisions they've made in the past, because it's such an important part of how they grow the company.

Speaker 3:
[07:57] Sounds like there's a lot to get into today. But before we dive deeper, I quickly want to make sure that I mention something that's pretty exciting to me. At the Berkshire Weekend, which is coming up soon in Omaha, during the first weekend of May, Shawn, both you and I will be there, and all members of our intrinsic value community are invited to join us. Members will actually have an exclusive dinner together Saturday evening, after the shareholder meeting, and they will also have front row seats to the stock pitch presentation that we will be doing on Friday afternoon at the Hotel Indigo in downtown Omaha, from I think it's 1 p.m. to 3 p.m. local time, and there will be a happy hour afterwards too. I'd really like to see as many people as possible there. If you want access to all of our Berkshire Weekend events, and you aren't already an intrinsic value community member, you can apply to join at theinvestorspodcast.com/intrinsicvaluecommunity. I think I should also mention that if you want to watch the stockpitch presentation and join for the Friday social hour, we will have a limited number of spots open to the public on a first-come, first-served basis. Make sure you arrive early, and if you have any questions left, you can just email me at daniel at theinvestorspodcast.com, and I'd really like to see as many people as possible there. I mean, last year has been my first time at the Berkshire meeting, which was fantastic, but really meeting the people that we work with or spent most of our time within the community, that has been the best part of it, and seeing as many listeners, community members this year will be probably the highlight of Berkshire this year. Okay, so starting at the beginning with the company that we actually covered today, who started or founded CoStar, and what was the original insight leading to the founding?

Speaker 2:
[09:37] The founder and CEO is a guy named Andy Florence, and his story is one of the more unusual founding stories I've come across. And so like me, Andy grew up at the Washington, DC area. And by the time he was in his early 20s, he had this very specific frustration that kept bothering him. And it was that commercial real estate was one of the most opaque markets in the world. So if you think of the efficient markets hypothesis and the spectrum of the stock market maybe being closest to being the most efficient, commercial real estate was all the way on the other side of the spectrum, where you have huge gaps of asymmetric information between maybe with the seller of the property knows and with the buyer of the property knows and the discoverability of that information. And so if you were a broker trying to find office space for a client in 1987, what you were doing was essentially calling other brokers and just flipping through newspaper listings and then driving around neighborhoods. And there was no systematic data, there's no database and there was no way to just quickly answer the question, what's available, what is the property worth, and then what is the market doing around that property?

Speaker 3:
[10:44] It does kind of sound like Warren Buffett's very early days in the stock market too. But of course, there has been more news and information about those companies. It is quite astonishing though, when you consider how much money flows through commercial real estate, when we're talking about an asset class that is literally worth tens of trillions of dollars.

Speaker 2:
[11:01] Absolutely. And billions and billions of dollars were being incrementally allocated based on incredibly limited information, right? If you think about how much information we like to have investing in a stock, that is probably not the amount of information that people had available to make decisions on commercial real estate properties, especially three or four decades ago. And so Andy was about 24 at the time. And his big idea was that he was going to go and try and fix this. So he started CoStar Group in 1987. And the initial business was honestly just really unglamorous for him. He was as passionate as I think he was about it. What he did was he sent these researchers out into the field with clipboards and cameras and they would physically visit commercial properties and they would document everything from the square footage of it, who the current tenant is, what the asking rent is, how much available space there is. They would take photographs of the building and just really whatever information as much as they could possibly get. And then they would compile all of that and they would sell it to these paid subscribers who wanted access to that information on floppy disks. So that's what the original business was.

Speaker 3:
[12:11] On floppy disks. I kind of love that. So to get to it, it's 1987. So there's no internet. They're literally building a physical database of commercial real estate property by property.

Speaker 2:
[12:22] Property by property, city by city. And the remarkable thing is that the company never really stopped doing that. Even today, CoStar employs thousands of field researchers who are out visiting properties, verifying data, taking photos. And in a way, that's part of the moat. But it's also a very costly thing that's built into their business structurally. It's an overhead cost that they really can't get rid of. And so obviously, it is a much more sophisticated process now. There's satellite imagery involved. There's these automatic data feeds and machine learning and AI and all that stuff. But there's still a genuine boots on the ground element that just cannot be fully replicated by software alone. AI can take a lot of jobs. But if you're an on the ground rep for CoStar, I think for now, your job is pretty safe. There's no AI that's coming to replace you. And so this all creates what I think is a fairly large moat. A competitor cannot just wake up one day and decide to replicate 37 years of proprietary data collection. It would take billions of dollars in many, many years. And by the time you'd finish, CoStar would just be much further ahead of you because they've been continuously collecting data at full speed that entire time as well. So it's really not clear to me how any competitor could truly catch up to CoStar on a one-to-one basis.

Speaker 3:
[13:43] In the last couple of decades, investors have been accustomed to these software businesses with huge margins and that are not very capital intensive. These companies that actually build a moat because of all the capital they have to invest in the business, they usually build the moats that are actually surviving decades, even longer in parts that SaaS companies currently being punished by the market do not necessarily have, especially not the ones that are not the top 1% in the industry. I would be interested though in how much they've actually invested in building these databases over the years.

Speaker 2:
[14:13] Well, so Andy Florence estimates that they've spent more than $5 billion on cumulative investments in research, technology, data collection, and also as anybody who works in data science, there's a lot of data cleaning. You get a lot of raw numbers and you actually have to figure out how to organize and process them in a way so that it's usable. The result is that if you're a commercial real estate professional in the United States, you're a broker, maybe an investor, a lender or a developer, CoStar Suite is really treated as essential, which is not to say everybody loves it. It's a very important caveat. Many people see it as a huge pain in their side, but it is arguably the Bloomberg terminal of its industry. There really is not an alternative that is nearly as robust. Part of why people get frustrated with CoStar is because the company knows that, and accordingly is very, very aggressive with taking price, or at least historically has been. And yeah, I mean, they're fully aware of how much the industry depends on them. And in a way, it reminds me of Adobe, honestly, where you have this essential industry-wide software that people have a love-hate relationship with, to put it nicely.

Speaker 3:
[15:26] Speaking of Adobe, the CEO has just recently left after many decades at the helm of the company. I think Andy is still the CEO at CoStar after what now is 37 plus years, right?

Speaker 2:
[15:38] That's right. Yeah, he's still a CEO. It's one of the longer founder CEO tenures in American business. But despite being founder-led, I was really disappointed at the amount of insider ownership here. I mean, you normally expect someone like this to own a really large stake in the business, but his stake is only worth about $70 million and it's less than 1% ownership in the overall company. And maybe to play devil's advocate, just to be fair, a big part of that is because they've issued so much equity over the year. They've done so many acquisitions. Naturally, his original stake in the business has become diluted over time. And if anything, you could maybe argue that the fact that he doesn't have a bigger stake is a reflection of him not being exceedingly compensated with stock-based comp packages. And so there's always two sides to everything. But still, when you think about looking at somebody that's run a business for nearly 40 years and founded it, I would have hoped that he would own more than 1% of it, to say the least. So just to talk about Andy a little more, he is a character. Having read through dozens of his earnings call transcripts, and he has this really unique combination of being what I would say is deeply analytical. He'll cite very specific data points down to the third decimal place off the top of his head. And then he'll also just be really optimistic. Sometimes to the point of almost being poetic about the company's opportunity. Others might call it delusional if you're a pessimist on the business. And so like he'll describe their addressable market as the largest and most important untapped opportunity of our generation. And he actually once said, with total sincerity, we may be appearing optimistic and that is how we are. And I mean, at least he's honest about it. But when you've compounded revenue for 59 consecutive quarters the way they have, at double digit percentages, I don't hate the optimism, right? I think you've earned the right to be a little optimistic and a little braggadocious, right?

Speaker 3:
[17:33] It's hard to argue with that. I mean, it's one of the best track records that probably we've seen with any of the companies that we've looked at. I mean, CoStar's 10-year revenue cager is more than 16% still after being around for decades. Although this makes me question even a bit more why he only owns 1% of the company. But again, we kind of discussed this before the call too. We just have a lot of these equity races. And as you said, we could also say that it's positive that he's not paying himself in stock all the time and even more diluting shareholders just because he got diluted because of these equity races. And as you also said, we're not talking about stock based comp here. So they only did it when they thought that it would actually create value because of the company that they would acquire.

Speaker 2:
[18:11] It's probably fair to say that Andy Florence is obsessively competitive. And we will see that, I would guess, today, as we talk more about some of the approaches CoStar has used to defend their intellectual property. But he is very, very protective of what he's built and very, very competitive.

Speaker 3:
[18:32] Yeah, you've teased some things and we will get to that. But before we do that, let's actually get into the core business. And again, let me emphasize, we will talk about quite a lot of different business units today. So you need to pay attention to what exactly we are saying here. So what exactly is CoStar Suite and who is the target audience and why is it such a sticky product?

Speaker 2:
[18:52] CoStar Suite is the best place to start because it's kind of the foundation of the business. It's the go-to subscription data platform for commercial real estate professionals. And if you don't know what that means, again, just think Bloomberg for commercial real estate. You still don't know what that means, go read about Bloomberg. But just to take a step back, think about everyone directly and indirectly involved in these typical commercial real estate transactions. It's a huge, huge market. And you've got the broker listing a building for sale. You've got the broker trying to find space for a tenant. You've got an institutional investor that may be deciding whether they want to buy an office building or not. There are lenders often involved, right, of whether they're going to make a $50 million loan against some building as collateral to fund a deal. And then you have developers analyzing whether to build new apartments in an area based on the commercial activity in that area, right? You're about to build a bunch of Amazon data centers, and it's going to create 10,000 jobs as a developer, you need to know that and then figure out the best ways to map out how you're going to help meet that demand by creating more supply of workers in those spaces. And so there's a lot of different reasons that people would use CoStar's data. And I think it's fair to say all of these people need comprehensive property data. They want comparable transaction history, right? See what similar properties sold for. You want market analytics, like vacancy rates and supply and demand dynamics, maybe like population demographics in a certain area. And then also cap rate trends. What sort of returns are people earning on these similar investments? What's happening with interest rates? All that stuff. And so CoStar Suite provides all of that data and much, much more. And at last count, they had about 270,000 subscribers to their core product, generating around a billion dollars a year in revenue. So that's the core business.

Speaker 3:
[20:50] 270,000 subscribers sounds like a huge market at first, but I mean the commercial real estate market must be a much bigger industry than that, right? I mean, it's kind of interesting because even after all these decades, you would expect them to kind of have a much deeper penetration into an industry that has as large of a TAM as really any industry out there.

Speaker 2:
[21:11] That is maybe one of the more exciting arguments of the bull case in thinking about how big the TAM is. Because CoStar estimates they're only penetrating about three to four percent of the, and this is the keyword, global total addressable market for professional CRE data, right? Because they're mostly focused on really just entirely North America or historically they have been. And so if you think about what that means, though, for their compounding runway, if they can just take this playbook and recreate it in other developed markets around the world, it's very, very compelling in the sense of how long that runway is, right? They're the dominant player. They've been at this for 37 years. They have tons of capital that can be used on investing into building out their database of information on global commercial real estate properties. And like I said, by some ways you draw it up, there may be at 3% to 4% penetration globally. I think that probably is wishful thinking. But also at the same time, we were talking before, Daniel, like you were saying, you don't think anything really like this even exists in Germany, right? So there's a lot of countries that they can expand into, and they're not even done probably capturing all the value that they can in North America. So I feel like 60 consecutive quarters of double-digit revenue growth, I don't know how long it can be sustained for, but I would, with pretty good confidence, say in 10 years from now, they'll probably still be growing the business at 8% to 10% a year. And so I think just to be clear, a big part of the gap in their penetration globally is because mapping out details on every commercial property in one city alone is really, really hard, let alone an entire country. So it took them four decades to get to a place where you could say they've done a pretty good job with North America. But besides their experience and their financial resources, that database does not translate easily internationally, right? Somebody in Hamburg does not care about a property in New York City. And so you have to start from scratch. You're going building by building, city by city, and country by country. And the international part of the story is where they're still very, very early. And maybe the analogy to use is it reminds me of Google Maps, where you have these Google vehicles with cameras, attach driving around and mapping all the roads. And it was one thing to do that in the US, which is where CoStar is at now. But now you're going to do that with the rest of the world. And so, for example, they've only recently launched in Spain. And they're also focused on building out in the UK, in Germany, in France. And that is still just scratching the surface of India, China, Japan. There's so much more that they could do this. But like I said, they're focusing on a couple of those key markets. And I correspondingly think the organic growth runway for the data business alone, the core business, is very, very strong, independent of these more speculative bets, like homes.com that they've invested in, which we'll get to and talk more about.

Speaker 3:
[24:15] I've actually just looked it up and apparently there is something in Germany which is similar. And it is a subsidiary of CoStar, which is called Thomas Daily. I've never heard of that before. So probably not yet the biggest business. But I certainly see that there are huge real estate markets, especially the commercial ones, in other parts of the world, especially in Europe, that they probably have some space to expand into. Still, I don't know, 3% to 4% penetration for the dominant global provider after 37 years. I'm honestly not sure if that's a red flag or a green flag in terms of the opportunity going forward and also their ability to execute. Maybe AI and robotics will kind of help accelerate their mapping and coverage of properties worldwide. But so if CoStar is the Bloomberg of commercial real estate, and that's a very, very high quality business to have, so what does the pricing look like for the products? You already mentioned that they take price quite aggressively. I could imagine they do that, but how exactly does it look? I kind of know what Bloomberg Terminal costs, which is a couple of $10,000 a year. So is that also the pricing that we talk about with CoStar Suite?

Speaker 2:
[25:18] As you'd expect, it's all subscription-based, tiered by the breadth of access to data that you want. So a basic CoStar Suite subscription is probably like $5,000 to $10,000 a year per user, scaling significantly from there, depending on how many markets you need data on, which analytics modules you're using, whether you're accessing loan data, international data, and just all the different ways they can package things. And so enterprise-level deals can reach hundreds of thousands of dollars annually. And actually, the renewal rates are really exceptional. Once a brokerage firm or investment fund integrates CoStar Suite into their workflow, and once their analysts are used to pulling comp data on it every day, running models against it, doing due diligence through CoStar, the switching cost just becomes absolutely enormous. And so you're changing how your entire team works and the institutional knowledge of how to use a system and the historical data your team has built up in it, the integrations with your internal systems, all that creates a very deep lock-in with high switching costs. And it's very, very similar to Salesforce, right? We talked about that a lot with Salesforce, and that is a form of moat. It's hard for your customers to leave, whether they like you or not. And I think this is pretty incredible. But management has said one of the biggest drivers of their annual churn is not from people switching to competitors products, but just simply from their customers going out of business. Like that's crazy. CoStar accounts get canceled because the business using them goes out of business, not because someone is switching to a competitor.

Speaker 3:
[26:58] I feel like slowly I kind of understand how much of a moat this business actually has. I mean, for example, if you compare to Salesforce, that is a business that has huge switching costs. But you can make an argument how, for example, the customer is insourcing solutions now that you have AI. In this case, it really doesn't feel like insourcing for anyone is an option because this data really just doesn't exist anywhere else. That sounds like either is no one competing with CoStar because that data just doesn't exist anywhere else. Or what they do is just really so difficult that no one else has even tried operating, or can get remotely the same scale to provide a comparable service. Is that how the competitive landscape looks?

Speaker 2:
[27:38] There are competitors for sure. I could name a few, MSCI, Real Capital Analytics, Rhianomy and also S&P Global too, but none have the breadth and depth of coverage that CoStar has. As far as I understand it, CoStar is effectively the industry standard that everybody compares against and there's actually a network effect there because all the commercial real estate brokers are using CoStar, so all the CRE listings end up on CoStar, which means all the investors use CoStar to track those listings, which means all the lenders use CoStar for their comp data, which means all the brokers use CoStar because that's where the comps are. So you get this self-reinforcing loop that's very, very hard to break into and the company actually estimates, and this is really incredible, they have more data on US commercial buildings than the US government does. That is the depth of their database.

Speaker 3:
[28:33] That's what happens when you spend four decades sending people out, boots on the ground, actually mapping all the commercial buildings that you see. So to summarize, what I currently see here is that we have generally high quality, defensible, under-penetrated data business, if we believe 3-4 percent of market share. But that's not even yet everything that the commercial side of the business, we are just the commercial side of it. So there are some other, you know, legs of the stool or parts of the business just within commercial. So what are those?

Speaker 2:
[29:01] Yep. So there's a few important ones we should talk about. So CoStar for Lenders is their platform that extends their offerings to banks and debt funds who are underwriting commercial loans and need to verify collateral, assess market conditions, track existing borrowers and all that kind of stuff. And it's a newer product, but I do think it's one where they see enormous opportunity. They also acquired STR a few years ago. And so STR is the leading data provider for the hospitality industry. So they're tracking hotel supply and demand and occupancy rates and all that sort of stuff. And it's basically an extension of the same basic model into another real estate adjacent vertical. And then they also have something called Visual Lease and Real Estate Manager. And these are SaaS platforms for comparing real estate, helping really large companies manage their lease portfolios. So for landlords. And as more landlords need to comply with accounting standards like ASC 842, which Google it, it's a fun one to say, it's a mouthful. The TLDR of that is that it requires recognizing leases on the balance sheet. And so Visual Lease provides tools that help with landlords and lease management companies. It helps them ensure that they're in compliance using CoStar software. So that's another category of what I would call very, very sticky B2B subscription revenue.

Speaker 3:
[30:27] So they have basically built this, a layered B2B franchise across commercial real estate data, hospitality data. And also I think the third part was corporate lease management. So that's already pretty diversified. And we haven't even gotten into homes.com yet or some of the other parts of the business because there are so many SITs earlier.

Speaker 2:
[30:47] And we're going to keep teasing it because I'm not ready to get to homes.com yet. But I do want to say Andy likes to make the point on earnings calls that this diversification, especially across the commercial real estate businesses, is in itself a form of resilience. And so in any given market environment, some parts of the commercial real estate ecosystem are going to be suffering, while others might be thriving. And so during COVID, hospitality was crushed, but industrial was booming. And during a rate hike cycle, transaction volume falls, but lease management becomes more complex as companies try to optimize costs. And actually, during downturns, that's when landlords need the most help getting their spaces filled, reducing occupancies. And so that is something CoStar can help a lot with. And so those subscriptions remain intact, even as the broader industry can fall off. And so in a few ways, their portfolio of businesses tends to be complimentary and even genuinely counter-cyclical, or at least they balance each other out. And so real estate obviously is not a monolith. And through their diversification, they have found ways to consistently grow the overall company, like we've said a few times. If you can grow by double digits for 60 quarters in a row, which is 15 years, to be clear, then you've clearly weathered more than a few storms without the business, or at least the top line, taking any major setbacks.

Speaker 3:
[32:13] That's a good dynamic to have in an industry that certainly is highly dependent on just the overall economy. If you think back to COVID, you just mentioned it. I think owning commercial real estate or having those firms as your customers really wasn't the best business to be in at the time. But then other parts of the real estate market, we know talking hospitality businesses that also did bad, were more important than ever, right? But then investing, we also know about this concept of diversification. And to me, it seems like the market is currently believing that this is what is happening when CoStar starts investing in homes.com. So can you help me understand why and how this B2B data provider, basically the Bloomberg of CRE, decides to then get into the consumer-facing property markets? I think this is the market where we need to be.

Speaker 2:
[32:59] The story starts there with apartments.com. And that is what sets the stage for them to do what they're trying to now do with homes.com by wanting to become the go-to place for agents to list homes and for home shoppers, like me, a few months ago, to find their next dream house. And so in 2014, CoStar acquired apartments.com for about $585 million. And that seemed like a really expensive deal because at the time, it was a solid, but not the most dominant rental listing property portal. And Zillow was arguably much bigger in rentals, and rent.com was also a significant player too at that time. And so naturally, people were skeptical about why this commercial real estate data behemoth would be buying a consumer-facing rental website. But what CoStar did over the following decade was execute one of the more impressive digital marketplace playbooks that I've seen. With this aggressive but very strategic advertising campaigns, they've managed to turn apartments.com profitable and into by far the biggest player in their market.

Speaker 3:
[34:15] So I assume that's also the goal for homes.com then, right? And if so, how about you walk us through how exactly that happened? What actually is the playbook and is it repeatable? And you know, that would kind of give us a better idea. I'll kind of hopefully make us understand if they can actually recreate that playbook with homes.com because currently it doesn't look like it's working.

Speaker 2:
[34:36] Phase one was content. So CoStar had this deep conviction that winning search traffic is fundamentally about having the best, most comprehensive content. And so not just listings, but listings plus photos and floor plans, amenity descriptions, neighborhood information, local school ratings, walkability scores, everything that you might want to know and more as a renter. And so they invested massively in the content quality on apartments.com. And so they sent field researchers out just like they did with building their commercial real estate database to physically photograph apartment communities. And from there, they created neighborhood profiles and built virtual tours before virtual tours were even commonplace. And so they did some really innovative stuff to differentiate the data and the quality of the data that was on apartments.com.

Speaker 3:
[35:29] For any company, though, you can have the best content or the best product in the world. But if you don't win the SEO battle, which is basically search engine optimization, then no one will ever know about you, right? It's like having the best Italian restaurant in your city basically hidden in some random basement. Although you got to say that especially those hidden places are often the best ones that you can find. But that's a side note. So for a website, people just aren't going to find it if your SEO is not the best that it can be. Unless, again, you have some really strong tailwinds, especially from word of mouth referrals or marketing. And as a media company, I think we know that pain all too well. It's one thing to make hopefully great podcasts and another thing entirely to get a lot of eyeballs on that podcast.

Speaker 2:
[36:13] That's definitely right. And CoStar understands that as well as anyone. And that's been integral to their success. Because if you have 50,000 words of unique high-quality content descriptions about every apartment complex and let's say Phoenix, content that's not available anywhere else in the internet, Google is going to recognize that. Google is very good at what it does and they're going to rank you first. And when someone searches apartments in Phoenix, you are going to come up and that traffic is coming to you for free. And it can compound thanks to this flywheel that gets created where you rank at the top and then Google sees that and then continues to recommend you and more people are satisfied with the search results and so on and so on and so on. You really don't pay for that traffic once you've earned it. Once people start getting into the habit of saying, I'm going to go to apartments.com. And then phase two for them was brand advertising and building on that organic momentum and that data quality. And so CoStar did something that a B2B data company would not typically do, which is launch a major national television advertising campaign. And so the apartments.com jingle has gotten really, really recognizable. And you have Jeff Goldblum as a spokesman, famously. And those ads were and still are everywhere. And you can think of the brand marketing as this way of accelerating growth and customer traffic once you've built a baseline of unique data and organic traffic.

Speaker 3:
[37:37] Just as with most of the stuff that we talk about today, I've obviously never seen the ad before, but I actually Googled them before jumping on our call today. And they're certainly entertaining and kind of strange too. So it's one of those ads that I would probably not skip and actually watch in the ad break of, I don't know, the Super Bowl or wherever they actually film in this. So I think it probably works quite well, although as you told me, they also spend a whole lot of money on those.

Speaker 2:
[38:01] They're beautifully strange, but that's worked. It really has worked. I mean, why would anybody care about an apartment listing website? But they've found a way to make cool and catchy or at least appealing in some way. And oh my gosh, I saw so many of those apartments.com ads when watching March Madness last month. And what they were hoping to do was not just get existing users to use the platform more, but they want to own just the entire category. So that in people's minds, whenever somebody is ready to move, the first thing they think is, hey, I should check apartments.com.

Speaker 3:
[38:36] And how do you monetize all the traffic then? So let's assume you're successful, all the traffic is coming in. How exactly do they monetize that?

Speaker 2:
[38:44] Ironically, it's pretty similar to what Google does with search results. So you have landlords and property management companies working on behalf of landlords who will pay for enhanced listings. And so that is basically just better placement and search results. It means being able to provide more photos of your property, the ability to directly receive rental applications from within the platform, and more things like that. So the more you pay, the more visibility you get. It is a pay-to-play dynamic. And crucially, CoStar is not generating revenue through any kind of lead diversion or clever advertising tricks. They're getting paid because they have built the most useful rental platform in the country on both sides for renters and for these property management companies. And so then the next phase, after monetization, has been maintaining this dedicated sales force that CoStar has built. And they have this separate specialized sales organization specifically for apartments.com. And it's a team that knows the multi-family rental market, including property management companies, the REITs and all the smaller landlords just inside and out. And so Andy Florence has said, and I'm going to paraphrase here, you cannot win a major marketplace without committed boots on the ground. You need salespeople who build real relationships with real property owners and managers. That's how you get supply on the platform. And once you have supply, demand follows because runners go where the listings are.

Speaker 3:
[40:14] I mean, this is a significant investment in human capital, though, right? That's one of the things that apparently is a topic today that you actually have a lot of capital costs that you have to, you know, build this mode. But it's also something that we saw in other companies. I mean, just a couple of weeks ago, we talked about Duolingo. It's a totally different company. But we also said that if you're just an app or just a website and you don't have any cost related to building the mode of that business, which is in the physical world, it's just very hard to actually build a mode in the long term. And it seems to me that CoStar is actually doing a great job of balancing the two of them, where they start building a mode by actually investing, you know, capital, having boots on the ground, physical infrastructure. And then they partner that with the website that they have. So all of that is, you know, working together to actually build these huge barriers to entry, which you need to be successful in this game.

Speaker 2:
[41:02] It is a barrier to entry, and it's an expensive one, especially in the short term. But the result is that today, apartments.com generates roughly $1.2 billion a year. So think about that from a $585 million total acquisition price, a little over a decade ago, to now a billion dollar plus revenue share. And that is a really extraordinary return on investment. And it took eight to ten years to really fully build that out in a way that was sustainable and profitable.

Speaker 3:
[41:31] So the formula in a nutshell is basically have the best content, spend a ton of money on marketing for brand awareness, then continue to reinvest in your platform success with a dedicated sales team, and then go from there. We will get more into it, but homes.com is kind of dragging down the financial results of the entire company a few years into what is this new expansion. And you could argue that apartments.com took a bit of time to get spinning too, but homes.com seems to be underperforming pretty much all of the targets they've set for it, even internally. Not just Wall Street analysts, but also internal targets. So the question is, despite those challenges, can they turn homes.com into a success, so we can see the business return to actually compounding earnings? Or are they basically throwing good money after bad, chasing a strategy that worked before, but isn't working now anymore?

Speaker 2:
[42:19] Yeah, I mean, as we talk about it today, I'm going back and forth because I have some hesitations. I'm trying to think about how homes.com has better data than Zillow and the way that apartments.com did. And that is a little bit questionable to me. And also, homes.com really didn't have a very strong foundation of organic traffic to go on. So I do think what they're trying to do with homes.com is harder and probably harder than they initially thought. But I think your summary pretty much captures things pretty well and I don't think we have time to get too deep into it today. But one of the things that they've really been engulfed in is these legal battles with Zillow. And so Zillow, of course, is trying to defend their turf, but they've also done some very clearly illegal stuff like stealing proprietary images of properties from CoStar to use on the Zillow platform. And if there's one thing you need to know about CoStar is that they are absolutely not afraid to be litigious. It is almost core to the business in a way. The only real note they have is their proprietary property data accumulated manually over decades. And so if anyone tries to steal or misuse that data, they will definitely notice and they have had a lot of success in the past winning those lawsuits. And so a more common issue for them is that a firm will order a subscription and then have one person try to share the account with the rest of their team. And again, they are infamously very good at picking up on that and warning you, and actually in some cases, they have sued users for misusing subscriptions in that way. So they are really not joking around. Protecting their data is everything to them. And it's also why I don't think AI can legally, an important caveat, legally displace this kind of business. No one else's co-stars' data. And again, there's no legal way for an LLM to scrape it.

Speaker 3:
[44:15] Fortunately, Netflix has never been as strict with suing people for sharing their passports. Otherwise, I would have one or two lawsuits on my name as well. Well, it seems like this would be an incredibly hard business to be replaced by AI. So fortunately, except for all the other SaaS companies that we always talk about today, we don't need to focus that much on AI. The data pretty much only exists because you had thousands of boots on the ground to get it. And now they're fighting over anyone who tries to illegally use it. And that's as much of a data mode as you could imagine any company having. Before we actually get to homestead.com, to tease just once more, tell me about LoopNet. There are a lot of these businesses here and a lot of subsidiaries across the real estate world for CoStar. So many actually that I fear covering them all will take an eternity. But each of them do different things. And so some of them actually not that small either. So we need to talk about them. And one of them is LoopNet. So tell me about what it does, how important it is, or the details.

Speaker 2:
[45:11] I promise we're going to get to homes.com. But yeah, LoopNet is CoStar's commercial real estate marketplace. And so just to intermix things even more, you might say it's like the apartments.com equivalent, but for commercial properties. Meaning if you're looking for office space in Dallas, or if you're a broker with a retail storefront to lease in Chicago, LoopNet is where you're going to go to browse. And so CoStar acquired LoopNet in 2012. And there was actually this question at the time about whether it was a good deal to do. And so CoStar Suite had commercial property listings already for professionals. So there was a question of why do you need a separate consumer facing marketplace for this? But Andy Florence's insight was that they serve different use cases. CoStar Suite is the professional subscription tool with deep analytics, historical comp data, detailed research, and everything that serious professionals need. While LoopNet is more like the top of the funnel marketplace, where somebody starts their search and they provide very different user experiences at very different price points or very different audience segments.

Speaker 3:
[46:17] Talking about price points, how does LoopNet actually make money? Is it a similar model to apartments.com?

Speaker 2:
[46:23] It is similar. And so brokers and property owners pay for enhanced listing exposure. And again, that means getting better placement on the site and in search results, more photos to show off, video options, interactive floor plans and more things like that. And so it's actually the number one commercial real estate marketplace by traffic in the US with around 11 million monthly visitors and revenue is several hundred million dollars a year. So that's very material for CoStar since they do about $3 billion in revenue each year. And so for context, across CoStar's entire portfolio of sites, they generate about 140 million unique web visits per month. And so LoopNet is an important part of that. And the thing with LoopNet though, is that it's dramatically under penetrated even among its target market. Among the top 1000 most valuable commercial properties in the United States, the trophy buildings where every dollar of marketing matters. LoopNet has only about 3.8% of them as enhanced listing clients.

Speaker 3:
[47:25] Dramatically under penetrated, it kind of seems like the pattern today, apparently. I mean, 3.8% of the top 1000. That is almost shockingly low for what's supposed to be a category leader, right? Maybe that's an opportunity or maybe it means that these trophy assets actually don't need any help selling themselves. I don't know. It just seems difficult to me generally to make sense of all these smart numbers today. I mean, they lead so many of these categories, but their penetration is always these absurdly low numbers. I mean, they're operating in these spaces for years and sometimes decades.

Speaker 2:
[47:56] It is. I agree with you. But at least to indulge the bull case, Andy Florence would say that there really are big opportunities here. So for context, institutional landlords like Brookfield, Blackstone, and these other big REITs require very specialized high-end sales relationships. So you're not just going to sell them with a cold call. You're selling them with data-driven ROI presentations and these relationships that get built over time. And so CoStar has been deliberately building out that premium sales force over the last few years. And Andy says it'll probably take another two to three years more to fully build it out. And once those clients come on, though, the contracts will be very large, probably very high renewal rates. And as they expand their use over time, right, like there's kind of an entry into the CoStar ecosystem that leads them to start trying other products, that comes at a very high margin as well. So LoopNet is this interesting situation. You have the market leader by traffic with what looks like a very low penetration of their highest value clients, some of their highest value clients at CoStar. And if they deliver on execution, it could become a very, very valuable part of CoStar's overall business.

Speaker 3:
[49:11] I know what everyone is waiting for now. It's homes.com, but we have a last pillar of the CIE business. You've got a platform called 10X, and apparently, this is for auction of properties, right?

Speaker 2:
[49:23] That's right. And there's this quote from Andy Florence from a few years back, where he says something along the lines of, he sold an office building for $101 million in 2009, but a German investor, I don't know if you know him, Daniel.

Speaker 3:
[49:36] Not me.

Speaker 2:
[49:38] Actually submitted $103 million bid, and the facts for it apparently slid under the table. And so he lost $2 million because a piece of paper slid under a table. And I would be a rate. It would be nice to have $100 million though, but I would be a rate if I lost the $2 million. And so in his words, he said, that's why we bought 10X. And so for context, you can think of 10X as the transaction engine that brings the entire CoStar ecosystem together. And so as an overall business, they attract listings from brokers and owners, distribute those listings to a very large buyer audience through LoopNet. While customers can use CoStar data and workflow tools to make diligence and bidding more efficient and then CoStar monetizes the completed transaction at the end of the day with a fee tied to the sale price that they facilitate via 10X. And so strategically, having a part of the business to really make their services and end-to-end offering is definitely valuable. But 10X does make up about less than 4% of their revenues. And in some sense, transaction-based is a very different type of revenue stream from the rest of the company. So economically, the 10X model should have attractive incremental margins if volume scales. Because once the platform and the traffic and the data infrastructure are all in place, each additional transaction can be processed at relatively low incremental costs. And so the trade-off, though, is cyclicality. Because unlike subscriptions, transaction fees are very, very closely tied to CRE deal volume, which can be very, very sensitive to interest rate cycles.

Speaker 3:
[51:21] Well, I'm looking at the 10X side here. I've got to say, it's got some cool stuff. I don't know if you've ever considered buying an old bank building or maybe a shopping center, Shawn. But if so, it looks like this is the place to go. I also see they have a website called land.com.

Speaker 2:
[51:37] Don't get me started, Daniel. That's a rabbit hole. We'll never get to homestock.com because I think land.com is super cool. I saw 10 acres of land for sale on land.com on this private island, off the coast of North Carolina, and it was in the outer banks for anybody who knows the area, and it was for $500,000. And so I texted a bunch of friends and family. I was like, guys, come on, this is our big chance to own an island together. And it doesn't matter if there's no house or no plumbing installed. We'll figure that out all later. And yeah, I don't know. Apparently nobody found that to be a compelling sales pitch, but I was ready to do it. And all thanks to my research in the CoStar.

Speaker 3:
[52:17] I didn't get a message, so you messaged the wrong friends. I have no idea why they didn't buy into it. I mean, that sounds like an absolutely bulletproof plan to me. All right. The moment we've been building toward, as we've touched on, CoStar is in so many ways what you would call a quality compounder with a white mold. And yet, if you look at its financials, which I'm currently doing here, that's not at all what you see. In the last three years, operating profits have actually fallen from nearly $500 million to negative $72 million in 2025. So if you just look at the numbers, you would think that CoStar was in a serious decline. But in the same way that Amazon conceal its profits for many, many years by investing so heavily into building its business, you might say the same is true here where CoStar's underlying profitability is being distorted by spending so much money on homes.com. And yet I would say the difference is that we actually don't know if this will pay off. Probably there were a lot of people back then saying the same thing about Amazon too. But here it does seem a bit more uncertain. So yeah, what is it? What is the homes.com strategy? Why has CoStar invested so much money? And why are investors so skeptical about it?

Speaker 2:
[53:25] We've gotten to the elephant of the room finally. And the most tangible reason why a company as strong as CoStar has seen its stock down more than 40% and almost 50% in the last year. So yeah, homes.com has CoStar's attempt to enter the residential real estate market. And to understand why that's such a big deal and also such a big controversy, you need to start with the size of the price. Residential real estate is the largest asset class in America. That's a fact. The total value of US residential real estate is something like $40 to $45 trillion. And real estate agent commissions alone are in the neighborhood of $100 billion a year. See what I did there? Neighborhood. That is an enormous, enormous market, much larger than commercial real estate, where CoStar has historically played in. And so any Florence calls it the largest and most important untapped market opportunity the company has ever seen. And from a purely top down perspective, that is actually pretty hard to argue with.

Speaker 3:
[54:24] He would call it untapped. I would say that Zillow is kind of already dominating the residential space, right? I mean, you said earlier that you even used Zillow yourself. And Zillow has, I think you mentioned, 230 plus million monthly visitors. So that's an incredibly entrenched player. So how does CoStar compete here and why do they think, you know, that doesn't matter to us at all?

Speaker 2:
[54:43] This is where I think the strategy gets really interesting. Zillow is dominant, yes, in terms of traffic. There's no question about that. But Zillow has a structural problem with its business model that CoStar thinks they can exploit. And so the issue is that when a home buyer comes to Zillow and clicks on a listing, Zillow sells that click as a lead to a partner agent and that agent may or may not be the listing agent for the property. And so in many cases, it's not. Zillow takes the buyer lead that came in because of the listing agent's property and then sells it to a competing agent.

Speaker 3:
[55:22] Okay, so hold on. Just so I understand. So a listing agent pays to have their home on Zillow, then a buyer sees it and shows interest in it. And then that buyer's information gets sold to a different agent. So how does that make any sense?

Speaker 2:
[55:36] For better or worse, that's pretty much exactly what happens. And you can imagine how much listing agents resent this dynamic. Because they've invested the time and money to put together a beautiful listing and they're paying for the exposure. And when a buyer shows interest, that lead could go to a competitor basically.

Speaker 3:
[55:54] I can see what that would create resentment. I mean, it's essentially using the listing agent's content to generate revenue that flows to their competition. That's what it is.

Speaker 2:
[56:04] Yeah. Yeah. And so Zillow still manages to dominate web traffic. But CoStar's pitch is that Zillow's monetization model creates these frictions and conflicts of interest with listing agents. So when a buyer clicks contact agent on Zillow, that inquiry is often routed to, as I've been saying, a paying premier agent, as Zillow refers to them, rather than the original listing agents. So homes.com's counter positioning is really simple then. You're listing, you're a lead. That's the whole sales pitch, right? So if a buyer expresses interest in your listing, that lead goes to you.

Speaker 3:
[56:42] That does seem like a much more compelling pitch to agents than what zillow offers. So I would just assume it's resonating and it's working. So if I know that homes.com does not yet seem to work that well for CoStar, why is that the case?

Speaker 2:
[56:56] Well, it's funny because the early reaction was really poor because agents didn't quite appreciate the difference in the models. And so they felt like they were spending money but not getting in return what they were expecting in the same way that they had spent money on Zillow. But there are definitely some early signs of traction. As of February 2026, CoStar said homes.com had more than 31,000 agent subscribers and was generating nearly $100 million of annual run rate revenue. But the bare case remains that the company has spent very heavily to get there. And investors still do not know whether homes.com will ultimately produce attractive returns on that investment. And lead volume to listing agents was up 48% year over year in January 2026. And leads to what they call member agents, agents who are paying for enhanced visibility. Those are up 187% year over year. So the engagement numbers do speak for themselves to an extent, even if the monetization is lagging. They're also replicating the content first strategy from apartments.com. So homes.com has been building out really rich content profiles about every home in America, not just the active listings, but neighborhood profiles, school information, market data, property history. And so the goal is to win organic search traffic before you invest heavily in paid marketing.

Speaker 3:
[58:20] Okay, I have to ask one question though, because that just only came to my mind now. If I'm an agent, do I make most of the money from paying agents? So that Zillow basically makes most of the money from agents that do pay to get the lead, and the other agents don't necessarily pay a lot of money. Because then it kind of makes sense that for paying agents, homes.com is not that attractive because now I'm paying not to get significantly more leads, but simply to have my listings over there, which of course, it's more fair. But I also see that why agents who do pay prefer Zillow, and that's how Zillow makes money. So it's not fair for the other agents because their content is getting exploited. But if they make money from the ones that pay, and other agents still have to be there because that's where all the traffic is, then it kind of makes sense to me. Well, even for the high quality agents that do pay.

Speaker 2:
[59:05] Yeah, I think that's right. I mean, I don't have high conviction in what they're doing with homes.com. My thesis is that they could entirely stop spinning on homes.com and it would be a good investment.

Speaker 3:
[59:14] Okay, so those growth rates, they do sound impressive on the surface. But what's the starting point? I mean, especially now at the edge of AI, we often see these triple-digit growth rates and it seems like the business is doing incredibly well. But below the surface, they don't actually move the needle. So if we have 187% of a very small number, that's still a very small number. So what's the base here for homes.com? Is it anywhere close to moving the needle?

Speaker 2:
[59:39] I think this is a concern at the heart of the bear case. The $100 million in annualized revenue is from essentially a standing start three years ago, which sounds like pretty good progress, but the math behind that is very painful because CoStar has invested more than a billion dollars in marketing to drive that growth, which is what caught Dan Loeb's eye. He's this famous activist investor we mentioned earlier and he wrote an investor letter where he made some very damning criticisms of this spending, I think is fair to say. And so if you look at CoStar's SG&A spending, so think of that as their overhead, and that includes their marketing and promotional spend on homes.com, they're basically just buying eyeballs at the top of search results, but that's not necessarily translating into consistent organic traffic. And you can see that their cost of sales have absolutely exploded accordingly, and it's more than doubled since 2022. And that maps over to this massive decline in recorded profit margins we've seen for the overall company, just because they're pouring so much money into these homes.com ads.

Speaker 3:
[60:44] And what were the original timeline expectations for homes.com to be able to justify this spending in the first place?

Speaker 2:
[60:51] They laid out some very ambitious targets in 2022 for what the residential business would look like. By 2027, which is now next year, it's hard to believe. But rather than admitting defeat, they've simply really just pushed back and revised their targets. And I don't find that to be particularly inspiring. And to be honest, I think there's a lot of sunk cost biases here. If they had known how much capital homes.com would eat up and what the results after three years would look like, I can guess pretty confidently that they would not have acquired it in the way that they did. But now, they have already made that spending. They've made some progress. So in theory, you could say that they should stop. But that would mean all the spending before would really be for nothing. Whereas clearly, they do have some optimism that even if it's going to take longer than expected and be more expensive, they have achieved enough traction where they can eventually displace Zillow.

Speaker 3:
[61:47] I know that you know how complicated buying a home can be, Shawn. So a lot of people in the US may remember the 2024 ruling on real estate agent commissions that had a couple of people thinking that these 5 to 6% commission cartel would basically break since it was and is price enabled by the National Association of Realtors or the NAR through their control of the MLS and the listing rules, their info property. So I think the thought was that after a court ruling against the status quo, many home buyers may choose not to work with their own agent at all on a much more limited capacity, especially the relationship with buyers' agents become more directly negotiated, funded out of pocket by the buyer. And that is plausible to me, at least if you look at it at first glance, because many international markets have no buy-said brokers or they play a diminished role. So the US is kind of an exception in many ways. We actually talked about this before our call and I just googled how exactly it is in Germany. In Germany, there's usually only one agent and he's basically paid 50-50 for both the buyer and the seller side. And we kind of philosophied over what's the best possible way to do it. Probably both settled on that the US system is quite good the way it is, but still that's how it's currently set up.

Speaker 2:
[62:59] Despite what some people had hoped and what real estate agents in the US absolutely feared, that has actually not come to fruition, at least this anticipated disruption, where buyer's agents are significantly less involved in the buying process and earning a lot less money. But if we do move in that direction over time, then Zillow's model of monetizing the buy side broker would theoretically die. And CoStar's bets on this alternative model focusing on the sell side agent would look very prudent. So following the court ruling, buyers now have to sign an economic contract with buy side brokers. And so many thought gone would be the days of simply clicking on a buyer's agent link on Zillow listing. And yet when I bought my house as a first time home buyer, we were really willing to sign a contract with a buyer's agent. And they were actually very helpful. And it was great because they were a family friend. And we didn't have that same confidence in being able to trust our broker in that same way. We might have approached things differently.

Speaker 3:
[64:05] The point though is, and that's what it's really about, is that homes.com is starting with the right model for this new world by actually monetizing sellers' listings. And whether that's true remains up for debate. But there's also a question of whether consumers actually care about these dynamics and just continue to favor Zillow because it's most familiar to them. I mean, you spend so much time, I know, at first hand looking for a house. And still you've not even come across homes.com, or ever heard of it. So that just shows how dominant Zillow actually is. And if you know one thing is that consumers don't change until you want to give them an incentive to. And I don't know if that's the case here. I mean, Zillow's co-founder, Spencer Raskoff, who, funnily enough, is now the CEO of Match Group, which is a company that we covered before as well, shared some concerns in, I think it was 2023, about exactly what ended up happening. Paraphrasing here, he basically said, if regulatory or legal unbundling of buy and sell side agent commissions happens, everything gets thrown out of the window. This would be a gift from heaven for CoStar. They start with the right model for that world. While Zillow would have $1.5 billion in revenues at risk in this upside down model and would have to reinvent themselves, a ban on commission sharing were to happen would be seismic. So for any listeners at home that aren't super well read about the nuances of real estate agent commissions, maybe we should just take a moment to explain exactly what that means.

Speaker 2:
[65:26] Yeah, it's a little tangent, but we can do it. The big structural change is that commission stopped being pre-baked into the MLS. And we're not referring to Soccer League. The MLS stands for Multi-Listing Service. And it's like a behind the scenes database of all available homes for sale that can only be directly accessed by licensed realtors. And so after August 17, 2024, when this court ruling happened, MLSs now can't display offers of compensation to buyer brokers. And so buyer agents must have a written representation agreement in place before touring any homes. Going back to that point I mentioned a moment ago about having to sign a contract directly with your agent as a home buyer. And so basically, this has forced buyers and their agents to have compensation discussions earlier in the process. And it also ensures that the discussion occurs off of the MLS by phone or email or something like that. But their commissions cannot just be baked into the listings automatically anymore, which they were for a long, long time. So now you see buyers signing agreements upfront with agents, and I did this too personally, about the scope of the representation and the term length and the exclusivity and exactly how the buyer agent gets paid, whether it's a percentage, a flat fee, hourly based on minimums, whether the buyer will ask the seller to cover those costs. And with all that said, the measurable impact on commission rates thus far has been much smaller than expected. Analyses from third parties like Redfin have largely found that buyer agent commission percentages have basically barely budged overall. And so while the rule changed increased transparency and negotiation rights, average commissions have not fallen dramatically in practice. And so if you're wondering why, well, I would say that old habits die hard. And even if the buyer is responsible for their agent's compensation on paper, sellers still often agree to cover it to keep the buyer pool as broad as possible, especially when buyers are cash constrained. And before the settlement, listings of homes for sale and industry databases included information on what the seller intended to pay the buyer's agents. And so buyers rarely had to negotiate fees with their own agents, because again, the fee was essentially set by the seller and was all just baked in. And in the new system, these databases no longer include information about fees. And that's so buyers and their agents can discuss fees upfront without being swayed by what a seller is willing to cover. But in reality, what we've actually seen happen is that agents can still, of course, communicate to each other about fees offline. There are certainly some stories of sellers saying that their agents have warned them that buyers might avoid their home if they don't make an offer to cover the buyer agent's costs. And so despite all the hopes of reduced realtor commissions and the idea that the status quo would dramatically shift to favor CoStar's monetization model for homes.com, only 27% of recent home buyers negotiated with their agent about fees or tried to, according to a Redfin survey. And personally, we did not try and negotiate, especially as first time home buyers, we were thinking, hey, we found a great realtor. If this is what the terms are, this is what the terms are. And I think that's common, right? Most buyers don't interview multiple agents historically. And there's just not a ton of shopping around for real estate agents once you feel like you have somebody you trust. And so honestly, I'm really not sure if buyer education has caught up on this yet. And even just a few months ago when I was buying a house, I didn't actually realize that something different was happening and that it was a new precedent for me to be signing a deal upfront. And so, yeah, I just don't think people realize that they can negotiate. It wasn't presented to me as a negotiation. It was basically like, hey, here are the terms of working with me. Are you good with it? And then I signed it. It didn't feel like an invitation to negotiate. So yeah, I just think there's a lot of inertia to overcome with what people are used to. And how they think you're supposed to go about the home buying process versus legally what they're now allowed to do, which is to demand that agents offer competitive negotiation. So it's just still very common for sellers to cover the cost of the buyer's agent. The TLDR is that because of that, Zillow's business model absolutely still works, even if to me, you could argue that it becomes a melting ice cube over time as buyer education and awareness of this rule change fluctuate. That's completely speculative.

Speaker 3:
[70:04] We talked a lot about CoStar's mode now and why it has this very functional, very profitable core business. I think we both feel that if homes.com is not working out and they just start spending money on it, that would be a bull case and the company should probably grow up, the fundamentals look better. But we have an activist investor here. We had Dan Loeb coming into this company writing this letter. So it does seem like there's more going on in the background and that problem is actually bigger than what we might communicate here today, although we already talked about how bad the financials look just because of this homes.com spending. But what exactly, what specifically did Third Point say? So what did Daniel Loeb point out that needs to change in this company?

Speaker 2:
[70:44] So Dan Loeb has taken on companies like Sony, Nestle and Disney before. And so these are not typically companies that you want to mess around with legally. And yet he doesn't back down either, or at least his firm doesn't back down. And so yeah, Third Point has been building a position in CoStar. And in late January, 2026, they published this open letter to the CoStar Board of Directors. And the letter is pretty blunt. The criticisms are that the stock has lost nearly 30% of its value over five years, while the S&P gained 94%. And management has invested and accumulated $5 billion in residential real estate across all of its residential portals. But these assets have generated just $60 million in revenue as of 2024. And as we were saying, the original 2027 targets for homes.com have just been completely abandoned without really much of a clear replacement timeline. And despite all of this, management compensation has remained pretty generous.

Speaker 3:
[71:39] Okay, so that's pointing out what is going wrong in the company. But what is actually what does Third Point want to see happen in the future? So, you know, that their investment is actually paying off.

Speaker 2:
[71:49] For them, it's about a full board overhaul. Third Point argued that the board does not have enough truly independent directors with the expertise and willingness to push back on management decisions from Andy Florence. And so, they want new directors who can provide real governance oversight on capital allocation. But they also made a specific operational argument, which I think is worth engaging with seriously. And they believe the residential strategy is fundamentally misguided because CoStar is trying to compete in a market where a network effects leader, Zillow, already has an entrenched position. And so, the capital required to meaningfully challenge that position is... It really could be unlimited. And there's not a guarantee that the returns on the other side are going to be attractive.

Speaker 3:
[72:33] So, what's the third point suggesting then at this point?

Speaker 2:
[72:36] Cutting residential investment back significantly. So, cutting back spending to promote homes.com. They want management to return capital to shareholders through buybacks and maybe even dividends and refocus on the core commercial real estate business, which already has these exceptional economics that we've talked about. It just doesn't have any need to fight with Zillow. Zillow is not anywhere close to their CoStar data suite on commercial real estate properties. And so, the argument is basically you have a wonderful business. Stop burning cash to put it in places where you just might not be able to win and don't have much evidence yet of being able to win.

Speaker 3:
[73:15] To my knowledge, even Zillow is not making a lot of money. So, this argument makes a whole lot of sense to me that even if you win this fight, you're basically in an industry on part of the market that is not the most profitable anyway. But do you think there's merit to that view?

Speaker 2:
[73:29] Yeah, I've come to increasingly favor the third point view over the course of researching CoStar. And I want to be clear that even the Bears would admit that the core franchise, the core business at CoStar is excellent. Nobody's arguing about that. And just the disagreement is over this residential bet. So homes.com and the potential of it and how value destructive it is, and whether Andy Florence has lost his edge and all that sort of stuff. The bullish counter argument is that this is exactly what people said about apartments.com. And look how that turned out. And so the apartments.com precedent is the crux of the whole debate. If you believe CoStar can replicate that playbook with better content, SEO, brand advertising, a dedicated sales force in residential for single family homes, then this current pain in the stock is temporary. If you believe single family homes is fundamentally a different area to compete in, and it's less attractive because Zillow has already won the consumer mind share battle, then third point is right, and they should just stop spending on this altogether. And it's not a clean answer either way.

Speaker 3:
[74:39] How did management respond to the open letter then?

Speaker 2:
[74:42] Two forms. During the Q4 2025 earnings call, Andy defended the thesis pretty firmly. He was very much not ready to concede that the homes.com bet was failing, it seemed like, but actually actions, as we know, speak louder than words. And alongside the 2025 fiscal year earnings, CoStar announced a $700 million share buyback, and that's the largest in the company's history. And they explicitly said they were reducing the 2026 net investment and residential by $300 million versus what they had been spending. So even if he won't say it, that is a very tangible concession. And it signals to me that yes, management has heard the message.

Speaker 3:
[75:24] That's a significant pullback. I mean, $300 million for a company that is doing about $3 billion in total revenue is not really a rounding error.

Speaker 2:
[75:33] It's not. And it does suggest management is balancing the long-term vision with some responsiveness to near-term capital concerns. And the question is whether it's enough to satisfy activists while still funding the residential strategy. Now we're in this kind of limbo. And maybe will they have to abandon the strategy altogether? And that means all the past spending has gone to waste. That is the uncertainty hanging over CoStar's valuation at the moment.

Speaker 3:
[76:00] How about we steel man the bullcase? I feel like we've talked a lot about it, and different parts of the business. And to just sum it up, if someone really believes in the CoStar story, what is the core bull thesis?

Speaker 2:
[76:13] CoStar Suite is genuinely hard to replicate. It has very strong pricing power because it's so essential to professionals in the commercial real estate industry. That is substantiated by their very high renewal rates. Increasingly, they serve a global market at low penetration rates. And we can debate what exactly an appropriate estimate of that percentage is. And unequivocally, is growing double digits organically and has been for a while. And so just that business in isolation would be a very compelling investment at a premium price. It would deserve 30 times earnings or more. And then you add in LoopNet, a market leader in commercial real estate marketplaces with this massive upside from deepening monetization with its highest end listings and clients and that's just another leg of the stool that very clearly has room to grow. And then there's a really exciting and contentious optionality that comes with homes.com and I don't think the bull case at this price point for CoStar requires homes.com to become as big as Zillow. And really, it just requires it to grow to a scale where it's a meaningful contributor to CoStar's revenue and earnings. Going from $100 million in annualized revenue to $500 million or a billion on what is largely a fixed cost base would be enormously value creating in the long run.

Speaker 3:
[77:33] Although at that point, we already talked about 5 to 10 acts of a business that has very much struggled to grow in the last couple of years. So there's one more point and that's the international expansion. I think we talked about it a bit before our call. So we have Domain in Australia and we have On the Market in the UK. Is that part of a bull case too or is this mostly on the margin?

Speaker 2:
[77:53] I think it is. Domain Holdings in Australia was acquired in August 2025 for about $2 billion or $3 billion Australian dollars. Australia is the number two residential portal and the thesis is very similar to homes.com. In markets where Zillow's adversarial model has not gotten entrenched, the you're listing your lead approach can really be positioned for success. So Australia is interesting because the residential market dynamics are different there. Domain has an existing customer base, established brand recognition and revenue of about $73 million a quarter, at least at the time of the acquisition. So that is real money and bringing CoStar's platform capabilities and sales team and economies of scale and all the stuff that they can bring in to Domain can really accelerate the monetization of that business. So honestly, I think I would rather see them make acquisitions internationally and build the homes.com brand outside of the US. Where they're not competing as directly with Zillow and have these dynamics in place between agents and buyers that better favor CoStar's model outside of the US.

Speaker 3:
[78:59] Okay. Now let's talk about some of the more recent acquisitions. So what's the Metaport deal about? That one was pretty interesting to me and it kind of stood out.

Speaker 2:
[79:08] Metaport to me is one of the more creative acquisitions that CoStar has made and it's part of this idea of that strategy we talked about earlier following the apartments.com model and needing to have better data that nobody else has. And so trying to offer something that Zillow can't offer. And so this deal was closed in February 2025 for about $1.6 billion. And Metaport is really cool. It's a company that developed technology for creating 3D digital twins of physical spaces. And so the way that it works is you bring a Metaport camera into a building, you scan it and the software creates photorealistic navigable 3D model that you can explore virtually. And so it's almost like a video game version of a real space. And by the time of the acquisition, Metaport had captured over 14 million spaces, equating to 50 billion square feet across 177 countries.

Speaker 3:
[80:02] Why don't you just mention kind of, you know, a video game. We actually just talked before the call that I've read this story about Pokemon Go and how they essentially took all the photos that were made over all these years. Basically, you said to kind of map things. So it's kind of an interesting model that I kind of feel reminded of when you told me about this. So basically, the idea is they are essentially trying to digitize the physical world, kind of similar to Google Maps, like we mentioned, but basically inside the buildings.

Speaker 2:
[80:29] Exactly. And for a company whose entire value proposition is, we have the most accurate and comprehensive database of physical real estate in the world, adding a 3D digital twin of every building, I mean, that's clearly very strategically valuable. So if you imagine if CoStar subscribers could actually walk through any available office space or industrial building before deciding whether to fly out and visit, that would be a huge, huge value add. And of course, it deepens the moat because now not only do you have the data about the building, you have an immersive representation of it.

Speaker 3:
[81:02] Let's come back to Andy Florence and management more broadly, because I think there's a real question here. Is having a founder CEO who has been at the place for 37 years and has very limited equity himself, is that actually an advantage or is it a disadvantage? Because if I look at it and we talked about it before the call, owning less than 1% of a company that you're leading for almost four decades, it's kind of weird. It's something that we haven't seen before.

Speaker 2:
[81:22] I think the strength of it is that Andy has navigated CoStar through all these different episodes from the.com bubble to the financial crisis, COVID. You have multiple cycles in commercial real estate. For the last 15 years, as we said a few times, he's never posted a quarter below 10% revenue growth, and he has this consistent long-term vision, I would say very deep institutional knowledge, and he does have an owner mindset, even if he doesn't have as much skin in the game as we ideally would like to see. At this point to me, it is self-evident that he's not managing to quarterly earnings targets. He is managing to longer-term goals, and he has a demonstrated track record of making these big controversial bets that turned out to be right. And so the apartments.com acquisition looked weird to many people at the time. Building out the field research operation looked expensive for that. It looked really inefficient. And LoopNet looked like it was going to cannibalize the core business. And each time, though, Andy was actually right and the skeptics were wrong. And I don't want to say we should blindly follow every CEO because you can have these catastrophic mistakes. But there is a lot of inspiration to be taken from the quality of the decisions that Andy has made over the years. I agree.

Speaker 3:
[82:33] If you just look at the track record of all the decisions that he made, it's very surprising that he owns only 1% of the company or slightly less because he really feels like every other owner and founder that we've looked at previously. Is there a case, though, for this being a risk? Because still, if you just look at the numbers, he does own very little equity. So that means he is not highly aligned with shareholders.

Speaker 2:
[82:52] I don't think he's highly aligned with shareholders. And I think that when Third Point raises these concerns about truly independent directors, and he has addressed that criticism seriously, and so on earnings calls, he will be really candid and he'll say things like, I know the results haven't met expectations on the residential timeline, and we pushed ourselves too hard and too fast in some areas. And here's what we've learned and here's what we're doing differently. So the $300 million reduction in 2026 investment in homes.com and the $700 million buyback, to me, are concrete illustrations of how he is listening to that criticism. And one other thing they've done is they've created a board called a Capital Allocation Committee explicitly to evaluate significant investments and to confirm that financial targets can still be met, including spending on homes.com. So the board is absolutely taking a more visible role in monitoring the spending after some of these criticisms. But still, Andy also makes a point that I think I find compelling when people bring up the capital allocation question. And he says, quote, We have $4 billion in cash, zero debt, and a core business generating hundreds of millions of dollars of EBITDA per year. We can afford to invest in this. Our competitors cannot. And so the balance sheet that CoStar has actually gives them a degree of patience and being able to execute their long-term strategy that, yeah, I mean, look at Zillow, in the last 10 years, they had negative operating profits. And so historically speaking, Andy Florence has probably earned the benefit of the doubt. His internal rates of return on some of the largest investments in the company's history have ranged from 17% to 39%, which is very, very good.

Speaker 3:
[84:35] That's actually such an important point that you made a moment ago. I mean, how many companies, especially in this industry and space, could absorb $5 billion of investment in a new business without any existential risk, right? I mean, there is this pattern recently, and I talked to both Clay and Kyle about it in my recent episodes, where basically you see the market punishing companies that spend a lot of money on investments. But again, those are the investments that actually build these modes in the long run. I do think that this, once again, shows that the CEO is actually behaving like a founder, like someone who owns a significant part of the business, and it's not just there to meet targets for the next quarter because WallSuite likes it. You also said that CoStar doesn't have any net debt, and doesn't really use debt to fund its acquisitions. That also means that a lot of cash is being used or equity is being issued to fund these deals, that's exactly why the equity stake of the CEO is so small. You use equity to acquire homes.com and apartments.com and we know that's dilutive, so how do you think about that?

Speaker 2:
[85:30] I think it's a bit of a taboo in the value investing world, but equity issuance does not have to be a bad thing if it's done at a price above intrinsic value and that's something Warren Buffett has very much emphasized over the years. When you look through the timing of when CoStar sold more equity in the company, they've generally been very opportunistic about when they would do so with the stock being pretty richly priced at those times. For example, we have a chart on screen where they did an equity raise in May 2020 at a price that's 50% higher than where the business is valued today, six years later. The result, as you alluded to, is that CoStar has had persistent net dilution for a long time. But that is not necessarily the equivalent of value destruction and actually the word would be accretive. While it's been a very accretive allocation process, even as total shares outstanding have risen from 197 million in 2008 to 424 million in 2025 on a split-adjusted basis, which again, yeah, that makes it very clear how Andy Florence's stake can become so diluted over time.

Speaker 3:
[86:36] Definitely. I think I generally can say that I have a much better picture now of what CoStar actually is. I really felt like the first time I heard about it was very confusing. Now, I feel like I have a much better sense of why the business is as good as you kind of teased. So let me see if I can actually do a little summary before we get into the variation. So I think it's fair to say that you have a generally special commercial data franchise within CoStar that's sticky, that's growing and that's potentially under-penetrated globally. Again, we don't know what the actual share is, but we can probably make that statement. Plus you have a CEO who's basically there for almost four decades by now. Yet the stock has massively underperformed the market for five years. Because of the pain of this residential investment in homes.com, and as such, a prominent activist has called for a border wall. So that's currently what we said. And meanwhile, the underlying data business keeps compounding. I mean, the 2025 results showed record bookings and management has shown some responsiveness to share the pressure. So I think the question we need to answer with modeling is whether the current valuation is generous, fair or actually quite attractive at today's levels. And also what this business might look like in five years. With homes.com either becoming profitable or management at least reducing the negative impact on the overall financials.

Speaker 2:
[87:54] The thing is you have to underwrite two scenarios at a minimum to be able to think about this valuation. And so one is where the company just cut spending on homes.com and implicitly apologizes to investors for the mistake, a very pragmatic approach, and then you see them try to win back favor. And I would be speculating here, but to me, we already saw some indication of this. What that could mean is doubling down on capital returns with accelerated share repurchases. And that would immediately help profitability in the short term. And then you would shrink the share count and that would contribute to earnings per share compounding longer term. And of course, though, the result of less growth spending is that the company will probably struggle to hit its streak of consecutive quarters with double digit revenue growth. So we call that one scenario, scenario one, and I'm probably slightly biased toward that scenario. Maybe there's 60% odds of that happening. And then there's a scenario where the monetization of homes.com actually takes off. And that creates its own virtuous cycle. And if that comes to fruition, as the company has imagined, then I can say pretty confidently the stock is undervalued. And so obviously, I'm making up these percentages with the help of being approximately right, but that I'll be almost certainly precisely wrong, as our colleague Stig Brodersen would say. And so if I see that as being slightly less likely, yeah, let's assign a 40% probability to that scenario. And so now we've got two scenarios that I would consider to be the most plausible. And then everything in between can sort of be rounded up into one of those two buckets. And now we need to reconcile those two scenarios into a single fair value estimate. And actually, this was some very basic modeling. I would say that CoStar would be worth more if it stops spending on homes.com effective immediately, even if homes.com ends up working out decently well. And so anyways, with the arbitrary probabilities that I use, the fair value I get for the stock is about $56 per share, which at current prices at the time of recording, the stock is trading at around a 20% discount too. So I think it could be a pretty interesting opportunity for us to consider as an addition to the portfolio. The range of outcomes seem to be skewed in our favor, assuming management is rational and doesn't burn capital indefinitely. I do think Andy Florence has earned enough legitimacy to deserve that trust. And the market is pricing a lot of continued pain with homes.com. Plus there's a whole narrative that AI will kill everything that uses software. And so to me, that explains a lot of the weakness here. And we're at a price level where I would probably be open to a starter position. But I could easily see this going in the too hard pile, really for both of us. So I want to hear how you think about it.

Speaker 3:
[90:42] To be totally honest, I do think that in the beginning was clearly on my too hard pile. And this is one of the episodes where I truly felt that over the course of the episode, and also talking to you a bit offline about this opportunity, I felt like I get more comfortable with it. If you want to tell me they figured out their problems with homes.com either by turning around the business or because they stopped burning money in that segment and the stock trades at $60 a year from now, I wouldn't be surprised at all. And yet I also wouldn't be surprised if we see this getting much more messy. And that could mean they burn more cash on homes.com. That could also be that the activist investor is actually getting more aggressive, and that the board or the CEO just doesn't want to go with it. So I don't know. I feel like it's a difficult decision to make. But in my opinion, this is one of those companies that if you put it on the watch list, I'm asking myself, what exactly are you waiting for? To get the stock more cheaply or to have any changes in how the management thinks about homes.com? I'm not quite sure that if we would put it on the watch list, we would actually ever buy it. So I do feel like this is probably one of those where you can do a startup position, and then you see how it evolves. If it actually goes down further, you double down if you have the conviction in the business. If you see that the CEO is deciding that you don't double down on homes.com, they finally start giving that money back to shareholders, you likely see an immediate rise of, call it 15 to 20 percent in the stock price. So I would actually be open about a startup position in CoStar, which I didn't think I would say at the beginning of the episode.

Speaker 2:
[92:10] I got you to come around. I'm okay with it. Yeah. I'm a little nervous because there's so much to know about CoStar, that I'm 100 percent certain that there are a lot of things I don't know about the business, which is why we couldn't make it a full position, even if we were both really bullish on it. I think we should, as you suggested, treat it as a tracking position, where we give ourselves a little bit of skin in the game, which is an incentive to pay close attention to the business. If we build our conviction to a point where we want to allocate more money to it, then we should. If the stock just jumps around, but we're not really feeling more confident in the long-term prospects of the business, they're just dragging out the homes.com spending, more and more things are making the picture fuzzy, then we should just drop it. Maybe that'll be six months from now, a year from now. But I don't think it hurts a lot for us to do a tracker position in it, which would be 1-2% in the portfolio, compared to we consider 5% to be about a full position. So yeah. All right. Well, this was fun. Definitely one of our longer episodes. Daniel, we appreciate folks for tuning in and staying with us the whole time. But with that, we'll close the book on today's episode. And before we do that, I'd like to leave you with a little quote from Mark Twain, who says, buy Lant. They're not making it anymore. And it's a tongue in cheek expression, but I think there's also a pretty good argument for owning the company at the heart of the commercial real estate industry too, if you can get it at the right price, which we have a suspicion we might be getting. See you all next time.

Speaker 1:
[93:44] Thanks for listening to TIP. Follow The Investor's Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests and The Investor's Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third party products, services or advertisers do not constitute endorsements and The Investor's Podcast Network is not responsible for any claims made by them. Copyright by The Investor's Podcast Network. All rights reserved.