CSGP Q3 Deep Dive: Solid Revenue Growth, Margin Pressure, and AI-Driven Product Expansion

Real estate data provider CoStar Group (NASDAQ:CSGP) announced better-than-expected revenue in Q3 CY2025, with sales up 20.4% year on year to $833.6 million. On top of that, next quarter’s revenue guidance ($890 million at the midpoint) was surprisingly good and 3.3% above what analysts were expecting. Its non-GAAP profit of $0.23 per share was 21.8% above analysts’ consensus estimates.

Is now the time to buy CSGP? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

CoStar’s third quarter was marked by strong top-line momentum but a negative market reaction, as investors focused on the company’s expanding investments and contracting operating margin. Management highlighted robust revenue contributions from the recent Domain acquisition and continued acceleration in its residential portals, particularly Homes.com. CEO Andy Florance noted, “Homes.com is now the fastest-growing revenue product we’ve ever launched,” underscoring the portal’s rapid subscriber and bookings growth. However, the company’s decision to increase spending on product development and sales force expansion weighed on profitability.

Looking ahead, CoStar’s outlook is shaped by its commitment to product innovation, particularly the integration of artificial intelligence features across its real estate platforms. Management expects continued traction from Homes.com and ongoing synergies from recent acquisitions, while also anticipating improved margin performance as these investments mature. Florance emphasized, “We are now investing 50% of our Homes.com software development efforts... towards building a range of AI-empowered features.” As the company balances growth initiatives with cost discipline, the ramp-up of new offerings and international expansion will be key areas to watch.

Key Insights from Management’s Remarks

Management attributed the quarter’s revenue gains to accelerating adoption of digital real estate portals and successful integration of recent acquisitions, while also acknowledging increased costs tied to product investment and legal disputes.

• Residential portal acceleration: Homes.com saw a dramatic increase in net new bookings and subscribers, with management highlighting a 53% quarter-over-quarter jump in annualized net new bookings and over 26,000 subscribing agents—well above competing models.
• AI-driven product innovation: The company shifted 50% of Homes.com development resources to artificial intelligence, launching features like Smart Search for more intuitive home discovery. Early results showed higher user engagement, with users of AI Smart Search submitting 51% more leads after viewing listings.
• Domain acquisition integration: The August acquisition of Domain accelerated international revenue growth, especially in Australia, where management cited record audience metrics and improved product quality. The Domain team is being integrated into CoStar’s global platform strategy.
• Matterport synergy: The integration of Matterport’s 3D digital twin technology across CoStar platforms is driving customer engagement in both residential and commercial segments. Management expects Matterport to unlock new revenue streams as it scales sales efforts and product penetration.
• Legal and industry headwinds: Ongoing legal disputes with competitors, particularly Zillow, are cited as both a potential risk and opportunity. Management framed these lawsuits as significant for the competitive landscape, though acknowledged uncertainty around timing and outcomes.

Drivers of Future Performance

CoStar’s guidance is driven by expanding AI initiatives, international market growth, and efforts to improve efficiency in newer segments like Homes.com and Domain, while also navigating legal and competitive challenges.

• AI feature rollout: Management plans to continue ramping AI-powered tools, especially within Homes.com and future iterations for Apartments.com. The expectation is that enhanced personalization and search capabilities will boost traffic and conversion rates, eventually driving higher margins as development spending normalizes.
• International and product synergies: The integration of Domain and OnTheMarket in Australia and the UK is projected to expand market share and unlock operational efficiencies. CoStar intends to cross-sell its platforms and introduce core products such as LoopNet and CoStar Suite into these regions, aiming for long-term profitability improvements.
• Legal and cost headwinds: Uncertainties stemming from ongoing lawsuits with competitors and increased product development costs could pressure near-term margins. Management believes these investments are critical for future growth but acknowledged “costs are not materially going up in any way I see” beyond current sales force expansion.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be monitoring (1) the pace of AI feature adoption and its impact on Homes.com engagement and lead generation; (2) the integration progress and revenue contribution of Domain and other international businesses; and (3) how quickly sales force expansion translates into higher bookings and improved margins. Additionally, ongoing litigation outcomes and their impact on market share will be closely watched.

CoStar currently trades at $74.96, down from $78.24 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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