CoStar: We Like the Odds as Firm Comes After Zillow With Differentiated Residential Strategy
The competition among residential marketplace incumbents like Zillow, Realtor.com, and Redfin remains fierce, but wide-moat CoStar CSGP is emerging as a new entrant in an already crowded space. The company has shown great progress in acquiring traffic on Homes.com and has already become the fourth-largest platform by traffic in the United States. The residential marketplaces in the U.S. have very distinct business models, with each model having its own set of advantages and disadvantages. CoStar’s strategy is to challenge the incumbents through an advertisement-focused business model that is more agent-friendly and with better customer experience potentially leading to faster adoption. However, we find CoStar’s model considerably more difficult to monetize compared with the one adopted by its larger competitors, Zillow and Realtor.com.
The leading residential listing websites have put out different estimates for the residential marketplace total addressable market in the U.S. ranging from $70 billion to $120 billion. We think that the market size estimates by industry participants are exaggerated and the true residential market size for companies like Homes.com, Zillow, and Realtor.com is around $13.2 billion. CoStar’s management hopes to maintain its incredible track record of capital allocation with its recent acquisitions of Homes.com and Homesnap in the residential marketplace segment. The success of CoStar’s residential investments is far from certain as it is still very early days in a long battle with the incumbents to dominate the space. We project that the company’s foray into the residential market can generate approximately $8 billion of shareholder value in our bull-case scenario, but it can also result in a $2 billion value destruction in a bear-case scenario.
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