CoStar Stock Falls After Cutting Forecast Again
Commercial real estate data giant CoStar Group saw its stock plunge to a six-month low Wednesday after reducing its revenue projections for the second straight quarter and detailing the challenges the market faces.
CoStar's revenue increased by 12% in the third quarter to $625M, but it missed its projections for a key profitability metric and revised its forecast for the full year downward.
Still, the company used its quarterly earnings call to point to a host of growing metrics across its platforms that it sees as encouraging, especially during a down market.
"Even though the property markets remain as some of the worst in decades, we still see high levels of engagement and usage by CoStar and our customers," CoStar CEO Andy Florance said, according to a Seeking Alpha transcript.
The company's earnings before interest, taxes, depreciation and amortization last quarter totaled $112M, below its prior guidance range of $115M to $120M. Chief Financial Officer Scott Wheeler attributed the miss to higher-than-projected costs due to "the prudent decision to accelerate our investments in our residential strategy."
But its top-line forecast is also falling. It now projects its full-year revenue to total between $2.445B and $2.45B, down from last quarter's range of $2.45B to $2.46B, which itself was down from the prior quarter's expectations. The latest change represents a decrease at the midpoint of the range of $7.5M.
After reporting these figures, the company's stock price initially fell 7.7%, then slightly recovered to end trading Wednesday down 4.4%.
Among the contributors to the worsening projections was commercial property sales platform Ten-X, which CoStar acquired for $190M in 2020. It is part of the firm's "other marketplaces" segment, which reported third-quarter revenue down 5% from last year.
"Ten-X is still facing the headwinds of the low transaction volume market," Wheeler said.
Interest in Ten-X has been strong, Florance said, as the platform reviewed $4.8B in potential assets for sale last quarter. But he said due to wide gaps between buyer and seller price expectations, only 35% of those assets moved through to auctions.
"It's still early to see an increase in distressed assets on Ten-X at this point," Florance said. "We continue to see the long-term value in digital transaction platforms for both commercial and residential real estate, regardless of any current market conditions."
The company's original platform, the subscription-based CoStar Suite that commercial brokers and landlords use for property data, had a 93% retention rate in the third quarter despite the pain that many in the office market are facing. The company projects the platform will finish this year with revenue up between 10% and 11% from last year.
It compared this performance to the Great Recession, when it said CoStar saw three quarters of revenue declines, and the pandemic-induced recession in 2020, when it said revenue growth fell to 4%. Wheeler said this shows the platform remains "mission-critical" to the industry.
"The current market environment is much worse economically than in 2020. And we see CoStar's revenue performance being stronger," he said.
As CoStar navigates these economic headwinds, the company is investing in growing its residential listing platform Homes.com to capture a greater share of a market that is led by Zillow. And it is working to expand its global reach. Last week, CoStar announced it made an offer to acquire UK-based residential marketplace OnTheMarket for £100M, or $121M.
"Doesn't seem like we thought that number out carefully. How could it just round out to £100M? Okay, we did actually," Florance quipped before explaining the impetus behind the offer.
"Our intention with the acquisition of OnTheMarket is to create the No. 1 property portal by combining the strengths of our leading UK commercial property site, CoStar, and our technology platform driving Homes.com with OnTheMarket's large network of agents," Florance said.
