AI And Digital Marketplaces Will Drive Powerful Long Term Earnings Upside

Catalysts

About CoStar Group

CoStar Group operates leading digital real estate marketplaces and information platforms that connect property owners, renters, buyers, and professionals globally.

What are the underlying business or industry changes driving this perspective?

• Rapid scaling of Homes.com with accelerating bookings, rising brand awareness and strong agent retention is positioning CoStar to capture a much larger share of residential marketing budgets. This may support faster revenue growth and operating leverage as sales productivity matures.
• Expanding global marketplace footprint through OnTheMarket in the U.K. and Domain in Australia gives CoStar more high-margin portals in markets where advertisers already spend heavily on digital listings. This may support sustained double-digit revenue growth and structurally higher net margins over time.
• Deep integration of Matterport digital twins and new 3D exterior capabilities into CoStar’s marketplaces increases listing effectiveness and renewal rates. This may support premium pricing, higher subscription revenue and improved earnings power across both residential and commercial segments.
• Heavy reallocation of software development toward AI driven features such as Smart Search and answer engine optimization is already associated with improved engagement and lead conversion. This indicates a path to higher monetization per visitor and structurally stronger long-term revenue and earnings growth.
• Rising bookings and improving retention across CoStar, LoopNet and Apartments.com, combined with new products like lender benchmarking and corporate lease analytics, expand the addressable market in data and analytics. This may support durable double-digit revenue growth and ongoing margin expansion as fixed costs are leveraged.

Assumptions

This narrative explores a more optimistic perspective on CoStar Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming CoStar Group's revenue will grow by 18.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.7% today to 16.3% in 3 years time.
• The bullish analysts expect earnings to reach $839.1 million (and earnings per share of $1.96) by about December 2028, up from $20.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $545.5 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 75.3x on those 2028 earnings, down from 1408.6x today. This future PE is greater than the current PE for the US Real Estate industry at 31.0x.
• The bullish analysts expect the number of shares outstanding to grow by 3.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The aggressive scaling of Homes.com, Domain and other residential portals assumes that current growth in traffic, bookings and agent adoption persists. However, a prolonged housing slowdown, tighter credit conditions or structurally lower existing home transaction volumes could cap marketing budgets and reduce demand for premium listings and Boost products, pressuring long term revenue growth and limiting operating leverage.
• CoStar is redirecting roughly half of Homes.com software development toward AI. Generative AI and answer engine optimization may evolve differently than expected, with larger general platforms or new specialized entrants capturing top of funnel traffic and monetization, which could dilute CoStar’s competitive edge and constrain future revenue per visitor and net margin expansion.
• The strategy relies heavily on maintaining very high renewal rates and steadily improving Net Promoter Scores across Apartments.com, Homes.com and CoStar’s data products. As sales headcount rises rapidly and pricing increases, service quality missteps or customer fatigue could drive higher churn and discounting, eroding subscription revenue growth and compressing earnings.
• International expansion via OnTheMarket in the U.K., Domain in Australia and broader European buildout assumes CoStar can dislodge entrenched incumbents and rationalize noncore initiatives. Local competitive pushback, regulatory changes or integration challenges could lead to slower than expected share gains and lower than targeted direct contribution margins, weighing on consolidated net margins and long run earnings.
• The Matterport acquisition and broader push into digital twins, lease analytics and lender benchmarking expand CoStar’s addressable market. These adjacent verticals may monetize more slowly than anticipated if customers resist new workflows or budgets remain tight, resulting in lower incremental revenue and delaying the margin uplift that the bullish narrative embeds in long term earnings forecasts.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for CoStar Group is $105.0, which represents up to two standard deviations above the consensus price target of $91.94. This valuation is based on what can be assumed as the expectations of CoStar Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $105.0, and the most bearish reporting a price target of just $60.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $839.1 million, and it would be trading on a PE ratio of 75.3x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $67.47, the analyst price target of $105.0 is 35.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.