Summary
- CoStar enjoys extremely reliable cash flows, with plentiful margins.
- The stock lacks tangible capital returns and trades at a historically high valuation.
- However, CoStar remains investable. Medium-term shareholder returns can still be in the double digits, even after a valuation compression.
Over the past few weeks, we have covered several REITs, for their reliable income streams and relatively fair valuations. However, one can be invested in the sector, indirectly, without actually owning any of the properties.
CoStar (NASDAQ:CSGP) is the market leader when it comes to providing information, analytics, and online marketplaces to the commercial real estate industry in the United States and the United Kingdom. The company owns and operates some of the most prominent websites in the sector, such as
- Costar.com
- Apartments.com, and
- landsofamerica.com
The company dominates the sector, having the largest real estate research department and database in the industry. As a result, its tools and analytics make it the optimal business for industry professionals and consumers of commercial real estate, to continuously interact and execute transactions by efficiently accessing and transacting accurate and standardized real estate-related information.
Despite some sub-sector of real estate facing troubles due to COVID-19, such as malls and retail properties, the demand for research tools has only grown further. Following its exceptional Q2 results, the company's shares have skyrocketed to new highs. The question that arises now is if shares have further upside, offering considerable future returns, or if there is little to be gained at their current price.
Source: Google Finance
In this article, we will:
- Go over CoStar's financials
- Assess the stock's return potential based on its current price
- Highlight some risks
- Conclude why CoStar remains investable even at its current price levels
Financials
The company's financials are genuinely amazing, with revenues being subscription-based, the majority of which have a term of at least one year. As a result, the company's cash flows are incredibly reliable and uncorrelated with the underlying environment of the actual real estate market.
