While CoStar Group (CSGP -1.50%) may not be a household name like Zillow (ZG -1.84%), it is the largest publicly traded provider of commercial real estate information, data, and analytics.
CoStar is also leaps and bounds ahead of any other platform when it comes to operating an online marketplace geared toward the sale and leasing of commercial properties.
How Zillow operates
Zillow mainly provides consumers with Web-based and mobile tools and data to aid in decision making regarding local housing markets. Zillow stock has been a high-flyer this past year, rewarding investors with gains in excess of 100%. Zillow competes with two other publicly traded companies: Trulia and Move, (NASDAQ: MOVE), operator of the Realtor.com website.
Zillow offers a wide array of products and services to benefit both consumers and agents such as:
· Premier Agent-marketing and business technology solutions for real estate agents.
· Zillow Mortgage Marketplace-connects borrowers with lenders for loans and mortgage rate information.
· Zillow Rentals-a marketplace, with a suite of tools for rental professionals.
· Zillow Digs-a home improvement marketplace, featuring both ideas and costs.
· Zestimates-information regarding home valuations.
The Zillow business model is based upon leveraging the high volume of unique visitors to its sites to charge fees and generate advertising revenue from: homebuilders, lenders, home service providers, brokerages, as well as other consumer related businesses.
During Zillow's earnings announcement for the quarter ending March 31, 2014, the company reported a 50% year-over-year increase in unique visitors, with 77 million views during the month of March.
Is Zillow worth such a high premium?
There is no doubt that Zillow is a well-run and highly respected company.
However, its $4.7 billion market cap is based upon a price-to-sales ratio which is more than double its closest rival, $1.4 billion cap Trulia, and over 8x greater than $537 million cap Move. Investors are willing to pay almost $20 for each dollar of Zillow sales in 2014. That seems steep.
The annual revenue per employee comparison above points out that each Zillow employee is not bringing in significantly more revenue than workers at Move who operate Realtor.com. While Trulia does lag behind in this metric, Zillow employees are not more than twice as efficient.
How CoStar operates
The universe of commercial property includes: office, industrial, retail, health care, multi-family apartments, health care facilities, data centers, and self-storage properties. These properties are part of an asset class estimated to be worth more than $11 trillion.
Industry leader CoStar Group recently announced that it has structured its operations into five main brands:
· CoStar-a comprehensive database of commercial real estate information.
· LoopNet-commercial real estate marketplace for leasing and sales.
· Apartments.com-a consumer oriented site focused on rentals, recently acquired by CoStar April 2014.
· BizBuySell-marketplace focused on business brokerage and sales.
· LandsofAmerica-marketplace focused on raw land brokerage and sales.
The competitive landscape
In general, $4.7 billion market cap CoStar Group seems to have less competition than its residential rivals.
In the commercial arena, much smaller $220 million cap REIS, has 210 employees focused solely on data and analytics products and services. By way of comparison, CoStar has 2,050 employees across all of its brands, and Zillow reported a total staff of 900 as of March 31, 2014.
CoStar's recent acquisition of Apartments.com creates an instant colossal competitor for Zillow, Trulia, and Move in the residential rental market arena. It will be interesting to see how this plays out over the next few quarters.
In 2012, CoStar acquired its largest competitor LoopNet, for $860 million. This game changing acquisition provided CoStar with LoopNet's online commercial real estate marketplace. LoopNet boasts over 8 million registered members, dwarfing any other player in that space.
CoStar has the ammunition for further growth
On June 9, 2014 CoStar confirmed that the underwriters of its recent 3 million share common stock offering exercised options for 450,000 shares at the $160 per share offering price. The offering was 50% oversubscribed according to a recent Wall Street Journal article, and raised $529 million which can be used for future acquisitions.
CoStar has a good track record when it comes to integrating acquisitions that are accretive to earnings. Since the 2012 purchase of LoopNet, CoStar stock has been on a tear, increasing by well over 100%.
A smooth move?
Could CoStar be eyeing MOVE as a potential acquisition candidate? Trading at a 2.4x P/S ratio, MOVE is valued at $537 million. CoStar has just raised plenty of cash to pull off the acquisition. Changing the operator of Realtor.com would also require approval by boards controlled by the National Association of Realtors.
Investor takeaway
CoStar is profitable, reporting GAAP net income of $0.34 per diluted share for the quarter ending March 2014, while Zillow reported a net loss of $0.16 per share for the same time period. Since January 2014 there have been over 45 insider sales of Zillow stock and zero purchases. Zillow shares have a significant short float of 36%, compared to a short float of 4% for CoStar.
CoStar appears to have created a fairly wide moat in the commercial space with its purchase and successful integration of LoopNet. However, the recent purchase of Apartments.com by CoStar indicates it is willing to throw its hat into the residential ring as well. That cannot be a comforting thought for current owners of Zillow shares.
