COSTAR GROUP, INC. (CSGP) stock intrinsic value fair value estimate & owner earnings analysis

CoStar Group runs the leading data and marketplace platforms for commercial real estate (CoStar, LoopNet, Apartments.com, Land.com, STR, Matterport) and is investing heavily to build a similar position in residential listings through Homes.com. That investment is the central story in this valuation. The core commercial and multifamily data businesses are highly profitable, recurring-revenue subscription products with very high customer retention; in 2025 they generated roughly $672 million of segment operating profit. Since launching its Homes.com monetization strategy in February 2024, the company has spent heavily on marketing (including national television campaigns) to build traffic and agent subscriptions against a much larger incumbent. That spending runs through normal operating expense, so it shows up directly in reported cash flow and earnings rather than as a separate investment line. The residential segment lost $361 million in 2024 and $230 million in 2025 - a real, ongoing cost, but one that improved by $131 million year over year, suggesting the investment may be starting to pay off rather than compounding indefinitely. We measured the company's normalized cash-generating power ("owner earnings": operating cash flow less working-capital swings, less stock-based compensation, less the capital spending needed just to keep the existing business running) over 2021-2025, a window that spans a normal year, the peak pre-Homes.com year, and the heavy-investment years. The median of that period, about $0.88 per share, is our starting point; we did not use the most recent year alone, because a single depressed year - itself explained by one-time acquisition costs - would understate the business's real earning power, and we did not use the pre-investment years alone, because Homes.com spending is a real and likely durable cost of doing business now. One accounting judgment worth flagging: CoStar is midway through building a large new campus (started construction November 2022, expected substantially complete in the first half of 2026). That spending has temporarily pushed reported capital expenditures far above normal levels. We treated the excess as a one-time project rather than an ongoing cost of the business, using the company's pre-project spending pattern (roughly 3% of revenue) to estimate normal, ongoing capital needs. We also note that reported net income was far lower than cash flow in 2025 ($7 million versus $430 million), driven mainly by acquisition-related amortization and stock compensation tied to the February 2025 Matterport and August 2025 Domain acquisitions - non-cash and largely one-time items that our cash-flow-based approach correctly looks through. Our base case assumes the residential segment's losses continue to narrow along a similar trajectory, the core commercial data businesses keep growing at historical rates, one-time acquisition costs fade, and campus spending normalizes once construction finishes in 2026 - producing roughly 8% growth in owner earnings next year, accelerating for a few years as the residential losses shrink, then settling into high-single-digit growth. Beyond ten years, we assumed the core data businesses - which show no sign of losing their competitive position - continue to grow modestly, near 1% a year, in line with what the business can fund from earnings already available for reinvestment. This long-run "tail" period accounts for roughly two-thirds of the total value in every case, which is common for a durable, moat-protected data business, but it does mean the value here rests heavily on our confidence that CoStar's core data franchise keeps its position for a decade and beyond, a view supported by its long history of dominant market share and high customer retention in commercial real estate data. Our bear case assumes Homes.com's marketing investment fails to durably dent the larger competitor's traffic advantage: losses stay elevated for several more years before management eventually scales back spending around year four, and the core commercial business's growth slows as well. Our bull case assumes the loss-narrowing trend continues and residential turns solidly profitable within a few years, while the core commercial and multifamily businesses keep growing at their historical strong pace and cross-selling opportunities from the Matterport 3D-scanning technology add incremental revenue. Putting these together, we estimate the shares are worth roughly $17 in a bad outcome, $33 in our central case, and $53 in a strong outcome. Given the meaningful gap between the bear and base cases, the margin-of-safety price is meaningfully below our central estimate - around $22 per share - and it assumes the residential segment's losses continue to narrow (rather than widen again) in the next annual report, since that is the clearest evidence available on whether the Homes.com investment is working. The biggest risk to this view is that residential losses stop improving or widen again, which would suggest the marketing spend is not building a durable position and would call for a lower estimate of value.