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The Best Company You've Never Heard Of

Michael Wong, CFA, CPA

With no true competitive threats, wide-moat commercial real estate data provider CoStar Group is a borderline monopoly.

The other companies in the space are predominately small startups focused on crowdsourcing data. These companies can't replicate the intangible assets from the vast cost and effort associated with compiling the data the company offers to its customer base.

Given the importance customers place on the underlying data, CoStar also keeps competitors at bay with a switching cost moat source. It's just too risky to switch sources. Strong platform effects found throughout CoStar's product offerings earn the company a network effect moat source, too.

Even with its existing advantages, we think CoStar's moat is growing stronger, and we award it a positive moat trend. The company continues to increase its coverage and boasts that it covers every building in the country, widening the gap between itself and its fragmented competition. The firm recently established itself as a leading provider of rental data with its acquisitions of Apartment Finder and Apartments.com. CoStar is only 30% penetrated in its target market for apartments, so we see room for growth in this area.

Moreover, CoStar is only 15% penetrated in the broker community and 7% penetrated with institutional investors, two groups we can see the firm going after. As several investments are integrated and benefits are realized, we project CoStar's economic profit to steadily increase over the next several years, reflecting our positive moat trend rating.

Finally, the company has delivered incredible value to its shareholders in recent years and has made numerous acquisitions that made competitive and financial sense. Management has been exemplary stewards of shareholder capital.

CoStar currently trades at a premium to our fair value estimate. But given its wide and growing moat and exemplary management, CoStar should be on investors' watchlists.

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