Grade: C — Some Red Flags, Investigate
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-26, FY ended December 31, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion
CIK: 0001057352
One-line verdict: CoStar is the dominant commercial real estate information platform (not a REIT), and its C grade reflects a constellation of watch items rather than a single critical failure. The one red flag: goodwill plus intangibles of $6.7B equal 81% of equity, driven by the Matterport and domain acquisitions. Revenue grew 18.7% to $3.2B, but net income was only $7M — effectively breakeven — because CoStar is investing aggressively in Homes.com. CFFO far exceeds NI (ratio 61.4x), reflecting massive non-cash charges. The M-Score of -2.10 is in the grey zone (between -2.22 and -1.78), the closest to the manipulation threshold in this batch. Six watch items total. CoStar is not a company to eliminate, but it demands attention.
| Metric | Result |
|---|---|
| Red Flags | **1** (financial 1 + management 0; Goodwill+Intangibles 81% of equity) |
| Watch Items | **6** (financial 6 + management 0; SG&A ratio, CFFO/NI extreme, Debt/EBITDA 6.2x, serial acquirer, goodwill surge 127%, M-Score grey zone) |
| Checks Completed | **22/23** (financial 17/18 + management 5/5 G1-G5; 1 N/A) |
| Beneish M-Score | **-2.10** (grey zone — closest to manipulation threshold) |
| Altman Z-Score | **5.57** (safe zone) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
The Homes.com Bet
Per the 10-K (in millions):
| Metric | FY2023 | FY2024 | FY2025 | Change |
|---|---|---|---|---|
| Revenue | $2,455 | $2,736 | $3,247 | +18.7% |
| Cost of Revenue | $491 | $558 | $686 | +22.9% |
| Gross Profit | $1,964 | $2,178 | $2,561 | +17.6% |
| Gross Margin | 80% | 80% | 79% | -1pp |
| Net Income | $609* | $139 | $7 | -95% |
*FY2023 included gain on previously held equity interest of $152M.
The filing is explicit: operating income was a loss of $72M in FY2025. Revenue grew 18.7% to $3.2B but SG&A spending — primarily Homes.com marketing — consumed the gains. The B3 watch (SG&A/Gross Profit = 82.4%) reflects this deliberate investment phase.
Per the pro forma note: "Revenue $3,448M, Net income (loss) $1M" — meaning acquisitions would have barely changed the near-breakeven result. The Domain Acquisition (Homes.com) is the company's bet to disrupt the residential real estate information market currently dominated by Zillow and Realtor.com.
Cash declined from $4,681M to $1,633M — a $3.0B drop driven by "$2.8 billion of cash used in investing activities and $559 million of cash used in financing activities, partially offset by cash provided by operating activities of $430 million." The massive cash burn is the Matterport acquisition and other investments.
The M-Score Warning
M-Score of -2.10 is in the grey zone (threshold: -2.22 for "likely manipulator," below -2.22 for "unlikely"). This does not mean CoStar is manipulating earnings — a company reporting $7M in net income on $3.2B revenue has little incentive to inflate. The grey zone score likely reflects the unusual financial profile: rapid revenue growth with near-zero profitability, combined with heavy acquisition activity distorting the model's inputs (asset quality index, depreciation index).
Goodwill surged 127% YoY from the Matterport and domain acquisitions. This is the E2 watch item — G&I roughly doubled in one year, which is aggressive but transparent given the disclosed acquisition activity.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1-A2 | Revenue Quality | ✅ | DSO 26 days, AR growth tracking revenue |
| A3 | Revenue vs CFFO | ✅ | Revenue +18.7%, CFFO +9.4% |
| B1 | Inventory | ✅ | N/A (services business) |
| B2 | CapEx | ✅ | CapEx declined 39% |
| B3 | SG&A Ratio | ⚠️ | SG&A/Gross Profit = 82.4% (Homes.com investment) |
| B4 | Gross Margin | ✅ | 78.9%, -0.7pp, stable |
| C1 | CFFO vs NI | ⚠️ | CFFO/NI = 61.4x (NI near zero) |
| C2 | FCF | ✅ | FCF near breakeven |
| C3 | Accruals | ✅ | -4.0%, low |
| C4 | Cash vs Debt | ✅ | Cash $1.6B covers $1.2B debt |
| D1 | Goodwill | ❌ | $6.7B = 81% of equity |
| D2 | Leverage | ⚠️ | Debt/EBITDA = 6.2x |
| E1 | Serial Acquirer | ⚠️ | FCF after acquisitions negative 2/3 years |
| E2 | Goodwill Surge | ⚠️ | G&I surged 127% YoY |
| F1 | M-Score | ⚠️ | -2.10 (grey zone) |
| **G1-G5** | **Management signals (new)** | **✅✅✅✅✅** |
Management Signals (New G1-G5 Framework)
**Why separate management signals?** Schilit's *Financial Shenanigans* treats abrupt executive, auditor, and director departures as important early-warning signals. 8-K Item 5.02 executive/director changes and auditor-change filings help separate clean financial statements from governance or continuity risk.
| # | Check | Result | Detail |
|---|---|---|---|
| G1 | CEO change | ✅ | No abnormal signal in the last 18 months |
| G2 | CFO / key financial officer change | ✅ | No abnormal signal in the last 18 months |
| G3 | Independent director / audit committee departure | ✅ | No abnormal signal in the last 18 months |
| G4 | Key operating or legal leader departure | ✅ | No abnormal signal in the last 18 months |
| G5 | Auditor change | ✅ | No abnormal signal in the last 18 months |
Data source: SEC EDGAR 8-K filings filtered for Item 5.02 + management-signals-by-ticker.json
Key Risks
Homes.com execution. CoStar is burning cash to build a residential real estate platform against Zillow's dominance. If Homes.com fails to gain traction, the company has spent billions on acquisitions (Matterport, domains) with no return.
Profitability timeline. Net income of $7M on $3.2B revenue is barely positive. Investors are financing a growth bet, not a profitable business in its current state.
Cash depletion. Cash dropped $3.0B in one year. At $1.6B remaining, another year of similar burn would require raising capital.
Summary
Grade: C. CoStar is not a company to eliminate, but the grey-zone M-Score and six watch items demand monitoring. The core commercial real estate information business (CoStar, LoopNet, Apartments.com) remains dominant with 79% gross margins and 18.7% revenue growth. The risk is entirely about the Homes.com investment — whether it will become the third pillar of the platform or an expensive mistake. Watch the M-Score: if it crosses -1.78 next year, the statistical model would classify CoStar as a "likely manipulator," which would escalate the grade to a red flag.
**Disclaimer**: This report is based on CoStar Group's FY2025 10-K filed with SEC EDGAR on February 26, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion)
Fiscal year ended: December 31, 2025