CoStar Stock Falls 10% After Less Bookings Leads to Downgrade

Commercial real estate data leader CoStar Group (CSGP) saw its share price drop to its lowest level this year, down by 10% at one point on Wednesday after the company reported a sharp decrease in net new bookings. 

By The Numbers

As reported by Bisnow, CoStar’s Q3 earnings report revealed $44M in new bookings, down 34% from the previous quarter’s $67M and 32% lower than the same period last year.

This significant drop prompted RBC Capital Markets to downgrade CoStar’s stock from “outperform” to “sector perform,” reducing the price target from $96 to $83. By midday on Wednesday, CoStar’s stock price had fallen to $69.90, reflecting a 9% drop following the earnings announcement.

Despite the challenges in bookings, CoStar’s overall revenue for the quarter was $693M, up 11% compared to the same quarter last year. However, this figure fell short of the consensus estimate by $3.1M. Net income also declined, dropping from $91M in 3Q23 to $53M this quarter.

Strategic Shifts

During an earnings call on Tuesday evening, CoStar CEO Andy Florance explained that the decline in bookings was due to a strategic reallocation of the company’s sales force. 

After launching monetization efforts for Homes.com in the first quarter, CoStar directed its sales team to focus on selling this product, which had been acquired in 2021. While Florance noted that Homes.com bookings saw “significant volume,” this shift came at the cost of lower productivity in selling CoStar’s core products.

“The reality of pivoting the entire sales force to new product is that they are all rookies in selling the new product,” Florance said. “This means lower productivity, lower service skills and suboptimal command and value propositions.” 

He added that much of the sales team has now returned to selling core products, and he expects an improvement in net new bookings in Q4 and into next year. According to Florance, September was the strongest month in the past year for CoStar’s core product sales, indicating a potential rebound.

Major Investments

Alongside the earnings report, CoStar announced an agreement to acquire Visual Lease, a software company specializing in lease and asset management solutions. The acquisition is expected to enhance CoStar’s Real Estate Manager product, but the purchase price was not disclosed. This move aligns with CoStar’s broader strategy to expand its software capabilities and services.

CoStar has been investing heavily this year to bolster its market presence. The company allocated over $1B to advertising campaigns, including Super Bowl commercials for its residential listing platforms, Homes.com and Apartments.com. Additionally, CoStar purchased an office building in Arlington, Virginia, for $339M to serve as its new headquarters.

Despite the current setback, CoStar’s CEO remains optimistic about future performance. The company is betting on the long-term success of Homes.com and its continued expansion through strategic acquisitions. However, the recent earnings miss and sales reallocation have shown that the path to growth can be challenging, especially when it disrupts existing core operations.

Growing Portfolio

The acquisition of Cerritos aligns with Hines’ broader strategy of expanding its self-storage portfolio. Earlier this year, the company, along with Trez Capital, secured a $108M loan for a 13-property self-storage portfolio across Dallas-Fort Worth. Hines is also developing two additional self-storage facilities in the area.

Founded in 1957, Hines manages $93B in real estate assets across 31 countries, showcasing its diversification into sectors beyond traditional commercial and residential properties.

With this latest acquisition, Hines continues to solidify its position in the self-storage sector, demonstrating confidence in the asset class’s long-term viability.