CoStar是一个看涨论点；市场过度惩罚Homes.com的亏损，同时低估了核心商业地产数据垄断的价值，尤其是在住宅门户资本支出减少的情况下。

We got to admit quality compounded bros did not have a good one and a half years recently and we could just you know keep going in that direction and talk about another business that is currently in our portfolio and is down about 25% and that's Co-Star Group and I should say that for this company it's not so much about figuring out any patterns today because it hasn't spent that much time on our portfolio. So you know I believe the price decline is mostly just volatility and momentum. was going down the entire year. It continues to go down and yet maybe there are some things that have changed and that we should cover.

So yeah, I figured we should just talk about Coaster, which you pitched about 3 months ago now. And since it might be a bit less known to our audience than some of the other companies we talked about previously, you might just want to give a quick pitch on why Co-Star seemed so interesting to you.

Yeah, it's still really early in the Co-Star thesis. it' be way too soon to write it off in one direction or the other. But really, the way to think about CoStar is that it's the Bloomberg terminal of commercial real estate. So, it's this data business empire built over 40 years of research and physically visiting and cataloging properties. And that gives them a monopoly like grip on the comps and analytics that brokers and lenders and investors all depend on in this industry. And so that core data franchise carries about 50% margins and the business overall has a net cash balance sheet and then has strung together something like 60 quarters of double-digit revenue growth. So it really is an impressive business.

And so the controversy and the reason the stock is down so much boils down to management having plowed billions of dollars into homes. com which is this residential portal meant to challenge Zillow. And most people are probably familiar with Zillow if they don't know what Homes.com is. But that investment has dragged the entire company's operating profits negative. And then actually it drew in an activist investor who was advising for change in Dan Loe who's a pretty famous investor.

So the thesis is basically that the market is so fixated on the cash burn tied to homes.com that it's handing you this crown jewel commercial monopoly data business at a discount. And you know for lack of a better words the expression is throwing the baby out with the bathwater is really what it seems like has happened here with co-star.

The briefest explanation of what happened is it's a SAS company and that might explain why it just can't catch a break right now. But I think the investments into into Homes.com had already slowed down when you made the pitch. So they are still burning money there, but at a much slower pace than they used to.

And I got to admit that when you first pitched Costa to me, I was a bit overwhelmed by all the different business units and some other yellow flags which were mainly about market share numbers that sort of seemed a bit weird to me. They were quite low. although it is technically a monopoly. And then the CEO also has a pretty low ownership stake and also the fact that the CEO seems to have a history of massive spending in order to win market share. All of that didn't help. Although to his credit, it worked out in previous endeavors. But that could also be why he is just too stubborn today to see that this fight is lost if it is.

I mean, even Dan Lope, the activist investor who came in, has already left the company. And while the public statement was quite brief, I think it became clear that he just didn't believe he could have any impact on the CEO Andy Florence and or the direction of the company.

>> If I were to sort of assume the perspective of co-stars CEO, I think part of what makes giving up on this bet so hard is that Zillow is such a dislikable company. [laughter] They really have some uninspiring business practices and have incurred lots of lawsuits for how they've run the company and lots of allegations of theft and stealing from Co-Star itself. So there is a pretty bitter rivalry between the businesses and actually Zillow has not performed well as a company anyways.

So, it feels like things are really ripe for disruption where Co-Star should be able to come in and just take over that business. But, of course, there's a massive amount of brand recognition working in Zillow's favor that makes it easier said than done.

And so I mean it does give me some pause to see somebody like Dan Loe lose faith in the co-star thesis where he was primarily arguing to cut spending on homes. com and there definitely is some thought of this maybe being an ego thing where like I said there is a pretty bitter rivalry between Andy Florence and Zillow and it may simply boil down to not as what is the best econ economic decision, but a sense of pettiness and wanting to take down sort of an enemy.

And so, all that said, CoStar has decided to drop its net investment into Homes.com from $850 million last year to what will be about $300 million this year. And then in 2030, it's supposed to come down another $und00 million. So even if the cut back in spending was not to Dan Loe's liking, there is a cut back occurring, which gives me confidence in not just writing off the entire business indefinitely going forward, especially when the valuation stripping out spending on homes. com is so reasonable for a business with the data modes that CoStar has that are built literally by photographing thousands of commercial real estate buildings across North America over several decades.

So, we do know that the worst case scenario of them just blowing everything on homes.com is very unlikely to come to fruition as they already cut back spending. And like I said, with this data mode that they've really built one building at a time, AI can obviously not replace that.

And still, the other thing that Dan Loe has criticized that maybe deserves some attention from us is Andy Florence's pay package of $40 million a year. And I think he does have a good point there. It probably didn't help their relationship though that he was suggesting that Andy makes too much money.

So in the end, it to me comes down to this being a story about valuation. And it has become pretty absurd how much negative value the market is ascribing to homes.com. The entire investment cycle cost about3 to5 billion depending on what you consider as solely being an investment in homes.com. And yet the market cap, however, has gone down from $40 billion to 11 billion. So it's done a lot of damage. And this is a very rough calculation since you also have to account for the fact that CoStar traded at a premium multiple that the market is just simply not giving to SAS companies these days. But again, the point is that Homes. com investment is not even remotely as impactful on the actual financials and prospects of the business going forward as the stock market is probably making it seem or at least that would be my opinion.

You mentioned earlier the presentation that we gave in Montana for our TIP summit and part of that was also understanding the importance of the market's narrative about a stock or company. And I can only feel confident in my decision about a stock when I do feel like I understand what the market dislikes about the company when I look at it and then when I have a different opinion and have good reasons to believe that I'm right. And only then can I figure out personally whether that makes sense to me to invest into this stock. I got to say in this case it's clearly homes.com what the market has bogged about. However, I think the market is also looking beyond that and it's just generally questioning whether they will ever see any of the cash flows that Costa produces. And still the more I looked at it, the more I felt like this is a massively mispriced opportunity. So I actually got away from my research here feeling way more confident in it than I was just a couple of weeks and months ago.

I've did some math and you just pointed out some of the points. The value that you know Costa lost just because of this homes.com bet and the spend is not that massive is ridiculous. I think if you would have to give homes. com a negative value just to make sense for the market cap to drop that much, it would be in the tens of billions almost. So I do believe it's way more mispriced than I first thought.

>> If I were going to recommend adding more to either our Adobe or Co-star positions at current prices, both are attractive, but I would probably prefer Co-Star.

Oh wow. Well, actually then should we add to it? I mean, if you like it more than Adobe, it should probably be at least a bigger position than 1.5%. And again, like part of why it's so small is that I wanted to get more comfortable with it. And I feel like I've done that. And especially now that it's lower. I mean, again, we've lost 25% from our entry price. I got to say, I feel a lot better about the opportunity here. So, what do you think about maybe pushing it up from 1.5% of the portfolio to maybe 3%. We've got the cash to do it. So, I don't see a reason not to. Yeah, I definitely would be happy to increase its weight in the portfolio.