CoStar (CSGP)

Real estate data provider CoStar Group (NASDAQ:CSGP) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 11.5% year on year to $732.2 million. On the other hand, next quarter’s revenue guidance of $772.5 million was less impressive, coming in 1.8% below analysts’ estimates. Its GAAP loss of $0.04 per share was significantly below analysts’ consensus estimates.

Company Overview

With a research department that makes over 10,000 property updates daily to its 35-year-old database, CoStar Group (NASDAQ:CSGP) provides comprehensive real estate data, analytics, and online marketplaces for commercial and residential properties in the U.S. and U.K.

A combination of increasing reliance on data and analytics across various industries and the desire for cost efficiency through outsourcing could mean that companies in this space gain. As functions such as payroll, HR, and credit risk assessment rely on more digitization, key players in the data & business process services industry could be increased demand. On the other hand, the sector faces headwinds from growing regulatory scrutiny on data privacy and security, with laws like GDPR and evolving U.S. regulations potentially limiting data collection and monetization strategies. Additionally, rising cyber threats pose risks to firms handling sensitive personal and financial information, creating outsized headline risk when things go wrong in this area.

CoStar Group competes with various specialized real estate data providers like Reed Business Information's Estates Gazette, Altus Group, and Moody's REIS Network in commercial real estate data. In the apartment listing space, it faces competition from Zillow Rentals, Trulia Rentals, and RentCafe. For residential listings, competitors include Zillow, Redfin, and Realtor.com, while Ten-X competes with commercial real estate auction platforms like CREXi.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $2.81 billion in revenue over the past 12 months, CoStar is a mid-sized business services company, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, CoStar’s 14% annualized revenue growth over the last five years was exceptional. This is an encouraging starting point for our analysis because it shows CoStar’s demand was higher than many business services companies.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. CoStar’s annualized revenue growth of 11.8% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, CoStar’s year-on-year revenue growth was 11.5%, and its $732.2 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 14% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 16% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and suggests its newer products and services will fuel better top-line performance.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

CoStar has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 11.8%, higher than the broader business services sector.

Analyzing the trend in its profitability, CoStar’s operating margin decreased by 18.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, CoStar generated an operating profit margin of negative 5.8%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for CoStar, its EPS declined by 19.2% annually over the last five years while its revenue grew by 14%. This tells us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into CoStar’s earnings to better understand the drivers of its performance. As we mentioned earlier, CoStar’s operating margin was flat this quarter but declined by 18.1 percentage points over the last five years. Its share count also grew by 11.6%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, CoStar reported EPS at negative $0.04, down from $0.02 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects CoStar’s full-year EPS of $0.28 to grow 139%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

CoStar has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 15.1% over the last five years.

Taking a step back, we can see that CoStar’s margin dropped by 23.7 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

CoStar burned through $26 million of cash in Q1, equivalent to a negative 3.6% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although CoStar has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.7%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, CoStar’s ROIC has decreased over the last few years. If its returns keep falling, it could suggest its profitable growth opportunities are drying up. We’ll keep a close eye.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

CoStar is a well-capitalized company with $3.97 billion of cash and $1.14 billion of debt on its balance sheet. This $2.82 billion net cash position is 8.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results. Although its EBITDA beat, its EPS missed significantly and its full-year EBITDA guidance fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock remained flat at $82.18 immediately following the results.

Updated: July 10, 2025 at 12:09 AM EDT

Are you wondering whether to buy CoStar or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

CoStar doesn’t top our investment wishlist, but we understand that it’s not a bad business. First off, its revenue growth was exceptional over the last five years and is expected to accelerate over the next 12 months. And while CoStar’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, its impressive operating margins show it has a highly efficient business model.

CoStar’s P/E ratio based on the next 12 months is 79.6x. This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $88.47 on the company (compared to the current share price of $84.50).