CoStar Group's (CSGP) challenges in making the residential business profitable are the main risk to an otherwise solid growth story, BofA Securities said in a note on Friday.
Under Chief Executive Andy Florance, the company has delivered strong double-digit revenue growth and expanding margins, BofA analysts said. However, its heavy investment, over $900 million in 2024 and 2025, into residential platforms is expected to bring earnings before interest, taxes, depreciation, and amortization margins down from the mid-30% range to the low teens in 2025, they added.
"We see structural challenges in scaling the Resi segment profitably, particularly in the US, and view this as the key risk to an otherwise solid-quality growth story," the analysts said, adding that activist involvement, including the recent addition of three new board members, could lead to pressure to scale back these investments.
A meaningful reduction in residential losses could serve as a catalyst for the stock, according to the note.
BofA reinstated coverage on CoStar with a neutral rating and $79 price target.
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