QUESTION DILUTION

“And I think this is pretty incredible, but management has said one of the biggest drivers of their annual churn is not from people switching to competitors' products, but just simply from their customers going out of business. Like, that's crazy. CoStar accounts get canceled because the business using them goes out of business, not because someone is switching to a competitor.”

“The $100,000,000 in annualized revenue is from essentially a standing start three years ago, which sounds like pretty good progress, but the math behind that is very painful because CoStar has invested more than $1,000,000,000 in marketing to drive that growth, which is what caught Dan Loeb's eye. And so if you look at CoStar's s g and a spending, so think of that as their overhead, and that includes their marketing and promotional spend on homes.com, they're basically just buying eyeballs at the top of search results, but that's not necessarily translating into consistent organic traffic.”

“And before we do that, I'd like to leave you with a little quote from Mark Twain who says, buy land. They're not making it anymore. And it's a tongue in cheek expression, but I think there's also a pretty good argument for owning the company at the heart of the commercial real estate industry too, if you can get it at the right price, which we have a suspicion we might be getting.”

“Don't get me started, Daniel. That's a rabbit hole. Never get to homes.com because I think land.com is super cool. I saw 10 acres of land for sale on land.com on this private island off the coast of North Carolina, and it was in the Outer Banks for anybody who knows the area, and it was for $500,000. And so I texted a bunch of friends and family. I was like, guys, come on. This is our big chance to own an island together, and it doesn't matter if there's no house or no plumbing installed. We'll figure that out all later. And, yeah, I don't know. Apparently, nobody found that to be a compelling sales pitch, but I was ready to do it.”

“And so in 2014, CoStar acquired apartments.com for about $585,000,000 And that seemed like a really expensive deal because at the time it was a solid, but not the most dominant rental listing property portal. And Zillow was arguably much bigger in rentals and rent.com was also a significant player too at that time. It is. And I agree with you. The thing is you have to underwrite two scenarios. So that's very material for CoStar. The result is that today, apartments.com generates roughly 1,200,000,000 a year. So think about that from a $585,000,000 total acquisition price a little over a decade ago to now a billion dollar plus revenue share. I mean, that is a really extraordinary return on investment.”

“So he started CoStar Group in 1987 and the initial business was honestly just really unglamorous for as passionate as I think he was about it. What he did was he sent these researchers out into the field with clipboards and cameras, and they would physically visit commercial properties, and they would document everything from the square footage of it, who the current tenant is, what the asking rent is, how much available space there is. They would take photographs of the building and just really whatever information as much as they could possibly get. And then they would compile all of that and they would sell it to these paid subscribers who wanted access to that information on floppy disk.”

“And so the issue is that when a home buyer comes to Zillow and clicks on a listing, Zillow sells that click as a lead to a partner agent, and that agent may or may not be the listing agent or the property. And so in many cases, it's not. Zillow takes the buyer lead that came in because of the listing agent's property and then sells it to a competing agent.”

“But despite being founder led, I was really disappointed at the amount of insider ownership here. I mean, you normally expect someone like this to own a really large stake in the business, but a stake is only worth about $70,000,000 and it's less than 1% ownership in the overall company. And maybe to play devil's advocate, just to be fair, a big part of that is because they've issued so much equity over the year, they've done so many acquisitions, naturally his original stake in the business has become diluted over time.”

“I think it's a bit of a taboo in the value investing world, but equity issuance does not have to be a bad thing if it's done at a price above intrinsic value. And that's something Warren Buffett has very much emphasized over the years. When you look through the timing of when CoStar sold more equity in the company, they've generally been very opportunistic about when they would do so with the stock being pretty richly priced at those times. And so for example, we have the chart on screen where they did an equity raise in May 2020 at a price that's 50% higher than where the business is valued today, six years later.”