On Wednesday, Citi maintained its Buy rating on CoStar Group (NASDAQ:CSGP), but reduced the price target from $97.00 to $90.00. The firm's analysis suggests that the third quarter of 2024 served as another period of transition for CoStar, with expectations that the company's bookings, which have reached $44 million, may have found a floor. Revenue growth is also anticipated to reach its lowest point in the fourth quarter of 2024.
Citi has adjusted its growth and margin expectations for the fiscal year 2025, taking into account the temporary dip in bookings that could affect the first half of the year. Additionally, the firm has increased its projected spending for the residential segment to approximately $900 million. Despite the near-term challenges, Citi identified positive signs that hint at a potential turnaround in the second half of 2025, contingent on a recovery in bookings.
The revised sum-of-the-parts (SOTP) based target price of $90 reflects a decrease, with approximately $82 attributed to the commercial real estate (CRE) segment and about $8 to the residential sector. The reduction in the CRE multiple is aligned with the low end of CoStar's previous investment cycles in multifamily properties.
Citi's continued endorsement of CoStar's stock comes with an optimistic outlook for the future. The firm anticipates an attractive risk/reward scenario for investors based on several factors. These include an expected improvement in commercial real estate transaction activity, an increase in multifamily housing supply, a rebound in salesforce productivity and capacity, and advancements in member acquisition strategies for Homes, which are projected to show progress in the first half of 2025.
In other recent news, CoStar Group reported a robust Q3 performance with a notable 11% year-over-year revenue increase, reaching a commendable $693 million. This marks the 54th consecutive quarter of double-digit growth for the company. The net income also saw a significant rise to $53 million, up from $7 million in Q1 2024. The multifamily segment of the business, along with CoStar and Apartments.com, demonstrated solid growth, with the former expected to near a $1.1 billion run rate in 2024.
CoStar Group's strategic acquisitions and the launch of Homes.com are recent developments that are key to the company's strategy, despite initial sales challenges. The company has plans to significantly expand its sales force, aiming for over 275 hires by the end of 2024, potentially doubling in 2025. This expansion is part of their strategy to capitalize on market opportunities, particularly in the U.S. and U.K. residential real estate sectors.
In terms of full-year 2024 revenue, the company's guidance is set between $2.72 billion and $2.73 billion, with an adjusted EBITDA projected to be between $205 million and $215 million. Despite a notable decline in core bookings, the company's resilience is evident in its continued revenue growth and robust balance sheet.
As CoStar Group navigates the evolving real estate markets, it remains focused on leveraging its platforms' strengths and addressing market challenges to sustain its growth trajectory.
InvestingPro Insights
CoStar Group's financial metrics and market position offer additional context to Citi's analysis. According to InvestingPro data, CoStar boasts a market capitalization of $28.41 billion, underlining its significant presence in the Real Estate Management & Development industry. The company's revenue growth of 11.99% over the last twelve months aligns with Citi's observations about the company's transitional period and potential for future growth.
InvestingPro Tips highlight that CoStar holds more cash than debt on its balance sheet and has liquid assets exceeding short-term obligations. These factors support the company's financial stability as it navigates the challenges and opportunities outlined in Citi's report. However, the high P/E ratio of 146.84 and the fact that CoStar is trading at high earnings and EBITDA multiples suggest that investors are pricing in substantial future growth, which aligns with Citi's expectations for a potential turnaround in the second half of 2025.
For investors seeking a more comprehensive analysis, InvestingPro offers 8 additional tips that could provide deeper insights into CoStar's financial health and market position.
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