Is Homes.com a Strategic Necessity or a Money Pit

Key Takeaways

• CoStar Group (CSGP) is embroiled in a high-stakes activist battle with D.E. Shaw and Third Point, primarily over its Homes.com investment and corporate governance.
• Activists demand divestment of Homes.com, significant board changes, and executive compensation reform, citing billions in losses and underperforming stock.
• CoStar defends its long-term Homes.com strategy, points to recent governance reforms, and has initiated substantial share buybacks and spending cuts on the residential platform.

The air around CoStar Group (NASDAQ: CSGP) is thick with tension. What began as private discussions has escalated into a public showdown, pitting the real estate information giant against two formidable activist investors: D.E. Shaw & Co. and Third Point LLC. At the heart of this battle lies CoStar's ambitious, and expensive, foray into residential real estate with Homes.com, alongside broader concerns about corporate governance and executive compensation. This isn't just a squabble over strategy; it's a fundamental disagreement over CoStar's future direction and how shareholder value should be created.

Shares of CoStar Group have been under pressure, currently trading at $44.99, a stark contrast to its 52-week high of $97.43. This significant decline, coupled with a 24.1% drop over the past 30 days and a 34.8% loss in total shareholder return over the last year, has undoubtedly fueled the activist campaign. D.E. Shaw, an $85 billion hedge fund with a history of successful interventions, has joined Third Point in demanding a board shake-up, greater oversight on executive pay, and a divestment or shuttering of Homes.com. CoStar, led by CEO Andrew Florance, has vehemently pushed back, calling the activists' demands "malpractice" and a "false narrative." The company insists its strategy is sound, its governance is evolving, and Homes.com is a critical long-term asset. This clash sets the stage for a pivotal period for CoStar, with the outcome potentially reshaping its strategic focus and investor returns.

Is Homes.com a Strategic Necessity or a Money Pit?

The central point of contention in the CoStar Group saga is undoubtedly Homes.com. Activist investors D.E. Shaw and Third Point view the residential real estate platform as an "ill-conceived" and "deeply flawed" venture, a massive capital drain that has yielded "negligible returns." They estimate CoStar will have poured over $3 billion into Homes.com by the end of 2026, generating a mere $80 million in annual revenue and accumulating more than $2 billion in cumulative losses. This narrative paints Homes.com as a "fiasco" that has "grossly misallocated capital" and "burdened consolidated EBITDA," contributing to CoStar's "anemic performance" and "heavily depressed" earning power. The activists argue that the residential market is dominated by entrenched competitors like Zillow, making it difficult for Homes.com to achieve meaningful differentiation or market share.

CoStar, however, staunchly defends Homes.com as a "strategic necessity" and a long-term growth engine. The company views residential real estate as the largest segment of the property market, asserting that a global digital real estate ecosystem cannot exist without a meaningful residential marketplace. CoStar highlights that Homes.com complements its highly profitable Apartments.com platform, strengthening its broader data, analytics, and marketplace stack. Management points to a proven playbook, mirroring its successful investments in Apartments.com and LoopNet, where heavy initial investment, tax write-offs, and aggressive marketing eventually led to market dominance and profitability. The company has committed to reducing net investment in Homes.com by $300 million in 2026 and at least $100 million annually thereafter, with a clear objective of achieving breakeven profitability exiting 2029. Despite a reported net loss of $31 million in Q3 2025 driven by residential investments, CoStar emphasizes Homes.com's subscriber growth of over 300% since early 2024, suggesting traction and future potential.

How is CoStar Responding to Governance Demands?

CoStar Group has not been passive in the face of activist pressure, implementing several governance changes in response to shareholder feedback, including from D.E. Shaw and Third Point. The company has appointed three new independent directors to its board: John Berisford, Rachel Glaser, and Christine McCarthy, replacing Michael Klein, Christopher Nassetta, and Laura Kaplan, who retired. This means 50% of CoStar's directors have been appointed in the last three years, signaling a significant board refresh. Additionally, Louise Sams was appointed as the independent board chair, and a Capital Allocation Committee was formed to review the company’s capital structure and investment priorities, including for major brands like Homes.com. These actions are presented by CoStar as concrete steps taken after "extensive engagement" with a vast majority of its shareholders over the past nine months.

Beyond board composition, CoStar has also addressed concerns regarding executive compensation and capital allocation. The company announced a "redesigned executive compensation program" for 2026, incorporating "more rigorous and quantitative goals, enhanced transparency and a simplified structure." This move came after meetings with its top 50 stockholders, representing 77% of shares outstanding. Furthermore, CoStar accelerated the completion of its $500 million share repurchase program in 2025 and launched a new $1.5 billion repurchase program in July 2026. These capital return initiatives are a direct response to shareholder demands for greater financial discipline and a focus on returning value. The company also recently amended its Executive Severance Plan, removing a contested clause tied to change of control and leadership transitions. This adjustment aims to reduce legal friction around board changes and keep management focused during the ongoing proxy contest, though some shareholders may view it as an entrenchment tactic.

What are the Financial Implications of This Activist Battle?

The activist campaign against CoStar Group carries significant financial implications, both for the company's operational strategy and its stock valuation. From the activists' perspective, the continued investment in Homes.com is a drag on profitability and a misallocation of capital that masks the strength of CoStar's core commercial real estate business. They argue that divesting or shuttering Homes.com would immediately eliminate substantial losses, allowing the commercial segment, which generated a 47% profit margin in Q3 2025, to "compound revenue in the teens and earnings power per share above 20% for many years to come." This would likely lead to a re-rating of CSGP shares, potentially unlocking considerable value currently suppressed by the residential losses. The current TTM net margin of just 0.7% and EPS of $0.05 underscore the activists' concerns about profitability.

CoStar's counter-narrative emphasizes long-term value creation through strategic investments. While Homes.com is currently unprofitable, CoStar's plan to reduce net investment by $300 million in 2026 and target breakeven by 2029 suggests a path to improved consolidated financials. The $1.5 billion share repurchase program, authorized in July 2026, signals a commitment to returning capital to shareholders and could provide support for the stock price. However, the company's valuation metrics remain elevated, with a TTM P/E of 930.61, P/S of 6.24, and EV/EBITDA of 119.90, significantly higher than industry peers. This premium valuation, despite recent stock declines, indicates that the market still prices in substantial future growth. The activist pressure, if successful in forcing a strategic shift, could lead to a more focused, profitable CoStar, but also risks disrupting its long-term vision and network effects.

What Does This Mean for Investors?

For investors in CoStar Group, the ongoing activist battle presents a complex risk-reward profile. On one hand, activist involvement can be a powerful catalyst for change, potentially leading to tighter capital allocation, clearer performance targets, and a more disciplined approach to underperforming segments like Homes.com. If D.E. Shaw and Third Point succeed in forcing a divestment or significant restructuring of Homes.com, the market could re-rate CoStar's stock, focusing on its highly profitable core commercial business. Wall Street analysts currently have a "Buy" consensus rating on CSGP, with a median price target of $73.00, suggesting a significant upside from the current $44.99 price. This implies that many analysts believe the company's intrinsic value is higher, potentially factoring in a successful resolution to the Homes.com challenge or the benefits of activist-driven changes.

On the other hand, governance disputes and proxy fights can be costly and distracting, diverting management's attention from core operations and strategic execution. There's a risk of increased legal and advisory costs, and potential turnover in senior roles could disrupt key initiatives. CoStar's management has explicitly stated that "abandoning" Homes.com would cause "irreparable harm" and "certain and significant value destruction," arguing it's "embedded across the CoStar Group" and drives network benefits. Investors must weigh the potential for a leaner, more profitable CoStar against the risk of disrupting a long-term strategic bet that management believes is crucial for future growth. The stock's current price, near its 52-week low of $43.92, reflects significant investor anxiety and a "sharp reset in sentiment," as governance and capital allocation come under intense scrutiny.

The Road Ahead: Key Watch Points for CSGP

The coming months will be critical for CoStar Group and its shareholders. The immediate focus will be on the outcome of the ongoing proxy contest and the 2026 annual meeting, where D.E. Shaw and Third Point are expected to push for their slate of directors. Investors should closely monitor any further changes to board composition, executive compensation structures, or capital allocation policies. The tone of future communications from both CoStar and the activist investors will provide valuable insights into the potential for a negotiated settlement versus an escalating proxy fight.

Beyond governance, the performance of Homes.com will remain a key metric. While CoStar has committed to reducing investment and targeting breakeven by 2029, any signs of accelerated progress or, conversely, continued underperformance, will heavily influence market sentiment. Keep an eye on subscriber growth, revenue figures, and the pace of loss reduction for the residential platform. The company's next earnings report, scheduled for 2026-04-27, will offer a fresh look at these numbers. Finally, track how competitors like Zillow and Redfin are navigating the residential market, as their strategies and performance will provide crucial context for assessing CoStar's long-term commitment and success in this segment.

The battle for CoStar Group's future is far from over, but the stage is set for a decisive period. Investors should remain vigilant, assessing both the potential for activist-driven value creation and the risks of a prolonged, distracting corporate struggle. The ultimate outcome will determine whether CoStar emerges as a more focused, profitable entity or continues its ambitious, capital-intensive expansion into residential real estate.

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