CoStar Announces Aggressive Investments in Residential Initiative

Wide-moat-rated CoStar Group CSGP reported middling results in the fourth quarter, and its 2023 EBITDA guidance was substantially below Wall Street expectations because of the company’s higher-than-expected investments in its residential business. Management also said that the company will not be acquiring Move, which is a majority owner of Realtor.com. The shares tumbled 5% in response to the quarterly results and the 2023 guidance.

The firm reported non-GAAP EPS of $0.38, 9% higher than the $0.35 in non-GAAP EPS during the fourth quarter of 2021. Overall revenue increased 13% on a year-over-year basis and adjusted EBITDA margin was 31.7% for the quarter. Annualized net new sales bookings, an indicator of future revenue growth, came in at $77 million for the fourth quarter, a 15% increase over the same quarter in 2021. Management’s 2023 revenue guidance of $2.46 billion-$2.48 billion implied growth of approximately 13% on a year-over-year basis and was largely in line with the Street expectations. The guidance for the company’s 2023 residential investments surprised the Street, as it was considerably higher than expected. The aggressive residential investments resulted in 2023 adjusted EBITDA guidance of $500 million-$520 million, representing a decline of 24% when compared with 2022. We are maintaining our $73 fair value estimate for CoStar Group after incorporating the fourth-quarter results.

We believe that the investments in the residential initiative will result in medium-term pain for the company, but this is a correct decision from a long-term perspective. CoStar will be investing heavily in its residential platform at a time when its competitors are cutting their expenditures. This can potentially result in strong market share gains for the company.