CSGP's core commercial real estate data business is high quality and durable; despite significant capital misallocation on Homes.com, the stock is undervalued/cheap because the market over-punished the company.

Let's do co-star. Um, on 10ear horizon, I actually Is this a hot take? I would put it at I would put it at S tier. >> Hot take. Is that you think so? >> I think I mean I think the core business is quite strong.

Um to me personally I would have put it just intuitively but you understand the company much better than I because you pitched it. Um to me it seemed like value today is probably better than value 10 years time or 10 years um down the road.

Um, but I couldn't necessarily pinpoint why exactly because you could also argue and I get that argument that it's the other way around because basically the stock is only going down because they currently spend a lot of money right now um to figure out homes.com and as soon as that stops the core business is as you would argue S tier.

Um, so I could definitely see that as well. Um, I think for me it really does come down to can anybody can anybody do what they do? I think that's the question we have to answer.

And then is there still um demand for that product?

I think if we do answer both with yes um and the valuation currently is low I think A to ST is certainly fair. Um and then you know I would certainly trust your judgment because again like you did much more research on on coaster.

So I think if you say it it should be ST here. Um I think it makes sense.

Would you say it's lower on value today or same level? That would be interesting. >> Yeah. Well, the value today. Yeah, we that's there is a tangent we can go in there, but just looking at the the 10-year um they have 40 years of commercial real estate data.

Um they've gone out building by building. They have a army of people that go out um and and you know document who owns the building, what's the square footage, uh the current tenants, all of these different things, what the property taxes are.

Um, you know the the unbelievable amount of data that they're you know manually collecting because real estate is uh exists in the physical world. Um and you know you can get uh you can have a lot of data on on things virtually. you need to actually go out into the real world and verify, okay, that this is the current tenant.

It's not outdated. Uh, and this is, you know, the market rate for the rent or the property taxes or or, you know, this is the vacancy rate.

Um, you can only really get a lot of that data by, um, going and visiting the properties in person, speaking to the land owners, speaking to the brokers and agents.

Um, and point being, uh, KOSAR has by far the most robust and datari, uh, platform. They're sort of the Bloomberg terminal of commercial real estate. Uh, and of course, commercial real estate is an industry that is, um, you know, fundamental to the economy.

It's not it's not going anywhere. Uh, we're always going to have commercial real estate.

Um so you know so so long as CoStar continues to um have the deepest data which it does by a widewide margin um I feel very comfortable that you know just talking about will this still be a high quality business in 10 years from now um absolutely that's why I say co-star S tier just because um there's no AI cannot scrape uh and recreate the data that CoStar does have.

Um, from a valuation perspective, this is where it's more uh more controversial or more nuanced, I would say. Um, because I think it ranks, it should bring very very high as well.

Um, but if you just look at the numbers, uh, they are distorted by this massive amount of homes.com spending. And I think that's been a huge misallocation of capital.

Um, I think that, uh, it it raises real questions about the the CEO, Andy Florence. Um, you know, it's sort of to me like, uh, a parallel to Zuckerberg and the metaverse. Um, this is a founder who has built an incredible company and made a lot of great decisions along the way.

And, uh, this was also, I don't want to say cat a catastrophic mistake, but a very significant mistake that was made.

um a huge misallocation of hundreds of millions of dollars. And um you know, it's uh when all is said and done, it's going to cost them well over a billion dollars um for uh something they're not going to really have, I don't think, much left uh left over.

And what I'm talking about is is homes.com. Um they're trying to build it as an alternative to Zillow. Uh I I I'm not sold on uh not to get into the details, but basically Homes.com is trying to do what Zillow does.

Um but with a slightly different business model behind the scenes, I don't have a ton of conviction in their business model being better than Zillow's.

And so, anyways, they've spent a ton of money trying to promote Homes.com. Um, they ran a bunch of Super Bowl ads, for example, as an alternative to uh Zillow. And the thing is, I think once they they turn off that ad spend, um, the traffic to the website is just going to fall just falls off dramatically.

But the point being there's not a lot of residual value and they're not getting a very high return on all this spending.

Um, and the company has recognized this. They had an activist investor come in. Uh, they've promised to they've already already uh toned back spending on homes.com. They've promised to uh reduce it further.

Uh, and they've also promised to put a significant amount of capital toward buybacks.

Uh and so really if you look at the core business and you just strip out the spending on homes.com and say that you know let's say in three to five years from now that that goes to zero um or you know something negligible uh I don't know the numbers off the top of my head but Kosar uh you know it's we're talking about something like 18 20 times earnings um for something that I said it like is an incredibly incredibly high quality uh data franchise um with a low risk of disruption.

So I think rightly the stock the market has punished the stock. They made major cap um capital allocation mistakes. Uh and the stock co-star is actually I believe at the moment the worst performer in the S&P 500 year to date.

uh and the it's their earnings in the short term are going to continue to be um you know uh hindered or or hampered by um the spending on homes.com but homes.com is not uh it's a mis you know it's a misinvestment of capital um but it's not >> it it's not critical to uh the enterprise overall so

>> yeah I think what matters to me and that's basically the 10 year 10ear value is the core business is S tier. Um that's also where they make all of their money. And then I do get the point that there were capital allocation mistakes, but generally I believe capital allocation mistakes um depending on the scale are great way to enter stock um pretty cheaply if the core business is still doing great.

In this case, if you look at the the valuation, I think over 12 months, um, Costa is down 65%. So that's an insane pullback. Um, and if you look at I think the the market cap right now is about 12 billion.

Um, so you know, you're talking about more than 10 billion lost in value. And if you compare that to the spend on homes.com, you would need to put a negative multiple of more than 10 times on that um just to explain, you know, the value decline in the stock.

And I believe if you do that and the core business is still S tier, the business is cheap.

Um I think it's a high quality business that has been punished rightfully, but I think the pendulum has swung just way too far um in terms of selling of the company.

What I didn't like, and I say that in the pitch, is the reason for the capital allocation because apparently um there's a personal problem that Andy Florence has with I think it's the CEO of Zillow.