TIP809: The Real Estate Data Empire Making a $5 Billion Bet: CoStar Group w/ Shawn O'Malley & Daniel Mahncke

**SPEAKER_1** (0:00)
You're listening to TIP.

**Shawn O'Malley** (0:03)
Think about every commercial building in America, every office tower, every strip mall, every apartment complex, every warehouse. Now imagine that for 40 years, there's one company that has had people physically visiting each one of those properties, recording what they see, photographing the buildings, and compiling the most comprehensive database to digitalize commercial real estate in the world.

**Daniel Mahncke** (0:25)
That actually sounds incredibly boring, but also incredibly valuable.

**Shawn O'Malley** (0:29)
It's both. It's so boring that most investors have probably never heard of CoStar Group. And yet, it's a company that just reported its 59th consecutive quarter of double-digit revenue growth through COVID and through the 2022 rate hike cycle that crushed commercial real estate in transaction volumes.

**Daniel Mahncke** (0:47)
Despite that extraordinary track record though, the stock has gone basically nowhere for five years, while the S&P is up close to 100%.

**SPEAKER_1** (0:59)
Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only.
All opinions expressed by hosts and guests are solely their own, and they may have investment in the securities discussed. Now for your hosts, Shawn O'Malley and Daniel Mahncke.

**Daniel Mahncke** (1:45)
I have never worked in commercial real estate, and I think it's fair to say that neither of us invest much into real estate. So when you told me, Shawn, that today's pitch was CoStar, my first reaction was, what even is that? And the name kind of sounded familiar to me, but I actually had no idea how big the business actually is, what exactly they do, and apparently, it is quite the battleground stock these days.

**Shawn O'Malley** (2:06)
Well, you're not alone on that because despite being close to a $30 billion company with revenues north of $3 billion a year, CoStar is just generally not that well understood by most investors. And it's a business that's enjoyed nearly 60 consecutive quarters of double-digit revenue growth, which is just astounding. And then you have $2 billion in cash net of debt, the nearly 50% profit margins on its core business. So things look very good. And the company operates in this niche that's invisible to consumers like you and I, and until recently, it was primarily a B2B data and analytics provider. A little bit of jargon there and as you know, probably not the kind of thing that is always coming up at dinner parties, unless you have a bunch of commercial real estate brokers dining together.

**Daniel Mahncke** (2:50)
Well, from what you told me though, the focus or the emphasis here is on until recently, because they do have quite a lot of side projects by now that also target other audiences and target customers, right?

**Shawn O'Malley** (3:03)
They do. And that's the big story with CoStar right now. And the reason it's generating so much controversy is that over the last five years, they have been pouring enormous amounts of money into trying to crack into the residential real estate market. So they've invested something like $5 billion into their own consumer facing real estate website called homes.com, to compete directly with Zillow and also realtor.com. And I had never heard of it until they started running this blitz of Super Bowl ads with Dan Levy.

**Daniel Mahncke** (3:33)
Well, that's probably not a good sign because Shawn just bought a house. So I assume when I ask you if you scrolled Zillow or homes.com, the answer is likely Zillow.

**Shawn O'Malley** (3:41)
I wish I could say homes.com though. It was Zillow. I'm guilty as charged. It's not because I have any special loyalty to Zillow, but for a long time, they've definitely had the best name recognition. And honestly, casually scrolling Zillow and maybe now homes.com, it's just fun, right? You're just you're looking at all these interesting properties and doing that kind of became a habit for my wife and I. And we'd actually have these date nights where we'd pull up Zillow on the TV and then just scroll through listings, sort of kind of half seriously fantasizing about what our lives would look like in all these different homes. And then we actually found one we loved. And now I do have a significant investment in real estate, I think to say the least. But from what I can tell from a user perspective, it is hard to meaningfully articulate any differences between Zillow and homes.com. But on the back end, there are some very big differences in how their business models work. And CoStar is hoping that that will be what enables homes.com to win long term. But in the meantime, they're just investing tons and tons and tons of money in trying to create a brand around this new product.