CoStar

CoStar Group has completed its acquisition of Zonda, a leading provider of new-home construction data and residential real estate marketplaces, for $800 million in cash.

Why it matters: The acquisition extends CoStar's reach into the single-family residential real estate market, providing the firm with a unique, proprietary dataset that enhances its single-family residential platform, and adds another profitable, highly recurring subscription business to the portfolio. The acquisition extends the total addressable market for the firm, as newly constructed homes represent a niche that the Homes.com platform effectively does not cover. Further, a higher prevalence of selling lots and newly constructed homes without a real estate agent presents a market with a differentiated competitive backdrop. CoStar has a long history of enhancing its commercial real estate data offering via bolt-on acquisitions, viewing them as a mechanism to more quickly acquire proprietary databases at costs lower than organic collection would require. We view the Zonda purchase as utilizing that playbook in the single-family residential vertical.

The bottom line: We are maintaining our $53 fair value estimate for narrow-moat CoStar Group and continue to view the shares as deeply undervalued. In 2025, Zonda generated approximately $170 million in revenue at an adjusted EBITDA margin of 23%, which should be accretive to near-term earnings per share, though we view the price paid as a bit higher than desired until we see stronger evidence of material revenue synergies with the Homes.com platform. Given little concern about antitrust clearance, our forecasts already incorporated the cash outlay and acquisition to occur during the second half of 2026.

We maintain our thesis that the single-family residential real estate market is less attractive in the United States than in other developed nations, such as Australia and the United Kingdom, due to the requirement for licensed real estate agents to submit listings to the multiple listing service, which prevents general portals like Homes.com, Zillow, or Redfin from generating home inventory that is differentiated from its competitors.

We believe that the ability to differentiate on inventory enables the potential to forge a network effect-derived moat, as superior inventory selection drives materially higher web traffic and incentivizes sellers to pay a premium to list on platforms that materially improve viewership, manifesting in shorter selling time and higher selling prices, all else equal. Given our belief that the aforementioned flywheel effect is significantly hindered as other portals in the US can use the MLS to recreate effectively the same inventory of homes for sale, we think that continued expansion into this vertical is unlikely to generate risk-adjusted economic profit over the next decade.

That said, we view Zonda as slightly differentiated, given that homebuilders often sell lots and newly constructed homes without a licensed real estate agent, enabling the possibility of unique listing inventory on digital marketplaces, similar to the dynamic we see in commercial real estate listings and apartment rentals with LoopNet and Apartments.com, respectively. Further, we believe this niche, proprietary database provides a unique revenue source in isolation, as access is sold via subscription to many of the largest homebuilders, developers, suppliers, and lenders in North America.

We are maintaining our $53 fair value estimate for CoStar Group, which translates to a price/earnings ratio of 39.5 times and 27.6 times our 2026 and 2027 adjusted earnings per share forecasts, respectively.

For the CoStar business, which combines the CoStar Suite and the collection of businesses that comprised the legacy information services segment, we forecast 9.8% annualized growth over the cycle, underpinned by mid-single-digit price increases and modest subscriber growth.

For the LoopNet business, the core CRE marketplace, we forecast compounded revenue growth of 11.2%, driven by continued subscriber growth as the firm increases its international CRE presence, modest price escalation, and improved mix shift as existing users pay for higher-tier subscription packages.

For the residential real estate segment, comprised most notably of Apartments.com and Homes.com, we forecast revenue growth of 12.6% over the cycle, driven by rapid scaling of the Homes.com platform as it increases penetration from its current subscriber base of 35,000 subscribers among its total addressable market of 500,000 agents. For Apartments.com, we forecast 11.3% annualized growth over the next decade, driven by modest increases in both price escalation and upselling to existing clients, with which it maintains a 99% retention rate, in addition to mid-single-digit customer growth as the firm increases its penetration among complexes with under 200 units.

Given the strong incremental margins associated with running digital marketplaces, and to a lesser extent, the commercial real estate data business, we believe that sustained revenue growth in these segments, in combination with modest profitability in the single-family residential real estate, should fuel considerable margin expansion, with midcycle operating and adjusted EBITDA margins of 30.0% and 36.5%, respectively.

We believe CoStar Group has carved out a narrow Morningstar Economic Moat, anchored in an intangible asset data advantage across commercial real estate, or CRE, and network effects spanning its CRE and multifamily marketplaces. Average adjusted returns on invested capital of 10.3% over the trailing decade, exceeding our 8.3% cost-of-capital estimate, corroborate our view, though returns have been materially dampened by acquisition-related goodwill drag and exuberant spending scaling the Homes.com single-family business. We forecast returns to modestly improve over the next decade to 11.3% as that spending moderates and integration matures. We remain skeptical, however, that capturing a critical share of Zillow's single-family dominance would ultimately be worth more to the franchise than simply reinvesting further in the core CRE and multifamily businesses, which we view as the primary earnings drivers for the foreseeable future. The residential segment itself splits along similar lines: the multifamily rental marketplace has built a network-effects moat of its own, while the single-family business faces an entrenched incumbent and has yet to demonstrate one.

The CRE research platform and LoopNet marketplace combine to contribute 88% of CRE segment revenue. With 99% of the top 100 CRE brokerages subscribing, the flagship CoStar Suite draws on 2.4 trillion data points across more than 8.5 million properties, a depth and breadth no competitor replicates. The resulting pricing power is demonstrated by annualized price increases of 5.6% since 2015, roughly 230 basis points above inflation, and no single customer exceeds 2% of consolidated revenue, limiting concession risk on future pricing. Only 25% of the dataset is in the public domain, and restrictive, litigated terms of service make the remainder difficult to replicate, even for well-funded entrants using AI systems to scrape data. The firm employs over 1,500 researchers who call and email brokers, physically inspect properties, and review court filings and tax records to continually widen its data lead, and renewal rates of 92% reflect the resulting stickiness. The platform also benefits from network effects, as more contributors improve data quality and attract more users, reinforced by the CoStar Power Broker Awards incentivizing brokers to submit full deal flow. LoopNet, the largest CRE marketplace with 83 times the unique visitors of the average competitor and six times its closest rival, captures over 90% of CRE transaction volume through a visibility-gated subscription model, growing revenue 9.4% annualized since 2020. LoopNet further insulates the research platform from its largest competitive threat, lets CoStar price that research platform more aggressively than it otherwise could, and creates a large upsell base for CoStar Suite, reinforcing why we see the segment's synergies as greater than the sum of its parts.

The multifamily marketplace, apartments.com, leads the online rental category with $1.06 billion in 2024 revenue and 43 million unique monthly visitors, roughly 2.3 times the revenue and 1.4 times the visitors of closest competitor Zillow Rentals. The platform is built almost entirely on institutional property owners, evidenced by just 1% revenue penetration among the smaller-unit properties that comprise two-thirds of the addressable market. Since 2015, the business has grown revenue, unique visitors, and customers annually by 20.8%, 26.8%, and 15.3%, respectively, while lifting average revenue per customer 60% over the trailing decade through up-selling and price increases against a largely fixed cost base. We believe this flywheel is difficult for competitors to unwind, even if they mimic the subscription-tier monetization model that CoStar pioneered in the space, as institutional owners are largely entrenched, evidenced by monthly renewal rates of 99%.

The single-family residential business, Homes.com, is the primary drag on the consolidated return profile and the reason we stop short of a wide-moat rating. The appeal is real, as a 65.3% US homeownership rate implies nearly double the addressable owners as renters, but unlike CRE and multifamily where property owners choose their marketplace, residential listing data flows through a cooperative multiple listing service that every broker must feed, denying Homes.com, Zillow, or Redfin any exclusive-inventory advantage. Zillow still commands roughly double the unique visitors of the next-largest player after two decades of network-building and remains only marginally profitable, underscoring how difficult it is to monetize a wide lead in this vertical. We are encouraged that CoStar decided to cut net investment in Homes.com by $300 million, or 35.2%, in 2026, but management does not forecast the business turning EBITDA-positive until 2030. Despite the size of the hypothetical market, we maintain the ceiling for single-family marketplace profitability is structurally lower than in other developed markets, capped by both MLS-driven limits on listing pricing power and the finite pool of real estate agent commissions, even if Homes.com eventually gains share.

Taken together, we view CoStar Group as a narrow-moat franchise: durable intangible asset and network effect advantages in CRE and multifamily are enough to clear our cost-of-capital bar, but continued capital destruction in single-family residential introduces enough uncertainty that we stop short of a wide moat. We see a credible path for the firm to materially exceed its cost of capital over the next two decades, particularly if Homes.com spending discipline holds, but a narrow moat remains the more appropriate rating given the current state of that business.

Expanding the Apartments.com network to smaller property owners, a largely untapped market for the firm that represents roughly two-thirds of the total addressable market, could provide tremendous upside.

Incorporation of AI and automated data-fees in the CRE research business could enable the firm to operate with significantly lower headcount than we forecast, lifting operating margins.

By owning a superior repository of verified data, the firm could improve monetization by training and rolling-out AI products and solutions specific to CRE that exhibit lower data hallucination.

Large-scale data sharing arrangements between CRE brokers, lenders, and/or upstart data providers could disrupt the core CRE business.

The firm could continue a relentless push into single-family residential real estate without meaningful progress, weighing down margins and risking a proxy fight.

The firm’s dominance within the CRE landscape could invite regulatory attention that threatens its pricing power.