Why CoStar Group Shot Up as Much as 16.1% This Week

What happened

Shares of CoStar Group (CSGP 0.35%) shot up as much as 16.1% this week, according to data from S&P Global Market Intelligence. The real estate marketplaces and analytics owner put up solid Q3 results and raised its full-year 2022 guidance. As of 2:37 p.m. EST on Friday, Oct. 28, the stock is up 16% this week.

So what

On Oct. 25, CoStar released its earnings for the three months ending in September. Revenue was up 12% year over year to $557 million, slightly beating analyst expectations heading into the report. More importantly, full-year guidance for 2022 was raised by $5 million to a range of $2.175 billion to $2.18 billion. While only a small bump, this raise shows that CoStar's management team is confident in its businesses even as the United States heads into a housing slowdown with rising interest rates.

CoStar Group owns multiple online real estate brands, the most important being Apartments.com, LoopNet, and CoStar itself. Currently, Apartments.com is executing well, as more and more renters are using its online marketplace to find an apartment to rent. Revenue growth for the platform was 11% in Q3, and management expects this growth to accelerate to 16% year over year in the fourth quarter.

Looking further down the income statement, CoStar raised its 2022 adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance by $48 million to a range of $665 million to $670 million. This is a significant bump and likely a big reason the stock is up so much this week.

Online marketplaces have fantastic unit economics, and as CoStar scales up each year, the company is getting increasing operating leverage and expanding its profit margins. If it hits the low end of its adjusted EBITDA and revenue guidance for 2022, the company will have 30.5% adjusted EBITDA margins for 2022.

Now what

At a market cap of $34 billion, CoStar group trades at a premium earnings multiple. If it hits the low end of its adjusted EBITDA guidance, the stock will trade at an adjusted price-to-earnings ratio (P/E) of 51, which is much higher than the market's average earnings multiple of 20. 

However, Costar Group has shown an incredible ability to grow its business, which is likely why investors are giving it a premium at the moment. For example, over the last 10 years, CoStar has grown its revenue by over 500%, with consistent growth year after year. If the company can repeat this over the next 10, it is likely that the stock will do well, regardless of a high starting valuation.