Last we analyzed Blackstone it was almost a year ago when the stock was trading at ~$73.
Fast forward to today and the stock has blown past our price target and is currently trading at $132 (80% upside).
With so much upside so quickly, we went back to the drawing board to figure out if the stock warranted a higher price target.
The short of it, is that Blackstone is a first in class asset manager and has a ton of room for upside over the coming years. The long answer with the important details are below:
Blackstone ($BX) Overview:
In case you aren't familiar with Blackstone, Blackstone is an asset manager who invests in real estate, private equity, venture capital, etc.
If you are familiar with Blackstone skip to the section labeled, "Blackstone Investment Thesis". If you're not familiar with them, continue reading on.
And unlike other financial stocks, investing in Blackstone isn't just investing in their cash, interest rate exposure or loan balances -- it is a chance to get access to these types of investments that only the 1% have access too.
In a time where public stocks are experiencing extreme volatility, companies like Blackstone give you "direct access to alternative assets".
This is because by investing in BX, you're subsequently gaining diversified access to these types of investments that aren't usually liquid and publicly traded. Stocks like BX offer you a unique, cheap, easy and liquid way to invest in these types of asset classes short of owning the asset itself.
Blackstone Investment Thesis:
Do you understand now why Blackstone is so unique and attractive?
Well, the rest of the market is starting to figure it out too and thats why the stock is up almost 100% in the last year.
But even with the stock up so much, we still think they have some massive years ahead of them.
Let's get into the details why:
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As we mentioned in our last analysis, Blackstone (BX) is amassing assets at a pace never seen before. Because asset managers make most of their money on assets under management, asset growth is one of the core metrics we look at when analyzing their revenue projections going forward. And as we mentioned last time, based off of their initial projections, BX was forecasting an additional $400 billion to flow into the firm over the next 3 years. This inflow of funds would fully transform BX’s revenue and earnings base into a higher function of predictable recurring revenue -- which as investors we love to see. This is very unique for the "finance sector" bringing in a SaaS like recurring revenue model.
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Fast forward to today and BX posted another quarter of record results across literally every trackable metric. Even if they're unable to continue producing stellar results, thereby attracting more AUM, Blackstone has shown (look back to 2020) that even in periods of subpar returns investor loyalty is higher than ever. With BX on the heels of launching the next two of their flagship funds (global real estate and corporate private equity) this quarter, we're expecting a speed-up of this AUM cycle. Due to this we're now expecting that BX can finish the year at $1T in AUM! This is actually four years faster than what BX told investors back in 2018 when they first set out to hit this threshold. Back then they thought this would be done by 2026! The fact that they're doing this years ahead of schedule speaks to the strength of their business and brand.
Interest Rate Exposure -- Real Estate:
We could keep going on and on, about why we love their business. But the stock price growth and business growth speak for itself.
Therefore we want to address the only elephant in the room which is interest rates.
Looking at public comparables, it seems that BX is more exposed to interest rates than it really lets on. But their portfolio is more insulated from any increases in higher rates and increasing inflation.
This is because unlike other financials that make higher margins in a rising rate environment as they extend debt, Blackstone takes the opposite approach and takes on debt in order to finance parts of their portfolio.
That is why rising rates would not be great for them as the cost of borrowing starts to increase. But their thematic approach to investing and diversification shows that they're not as exposed as many would think.
Specifically when looking in their real estate portfolio (which represents over ~50% of their earnings), 75% of the equity in that portfolio is exposed to sectors that should see strong tailwinds over the next year or so (e.g. rentals, healthcare, data warehouses, etc.). This matches up nicely with our view on real estate going forward. We believe some sectors of real estate will be hurt but their sectors should do quite nicely. In a nutshell our thesis is:
- Rentals: With interest rates set to increase, home buying should slow down as the cost of buying a home starts to rise. Because of this, the demand for rentals should increase -- thereby pushing up the price for most tenants. We're anticipating rents to rise across the US at over 2x inflation!
- Healthcare: In our outlook for 2022, we mentioned that healthcare should be a sector that dominates the markets this year. With people returning to doctor's offices and routine visits, the demand for this type of real estate should persist.
- Data Warehouses: The move towards cloud computing is all but guaranteed at this point. And due to this, data centers and warehouses are becoming more and more in demand over the last few years. With this trend likely to increase, demand for this type of asset should continue to spike year over year.
Therefore we believe any short term headwinds associated with interest rate increases should be mitigated due to the "hotness" of these three sub-sectors within the real estate sector.
Interest Rate Exposure -- Private Equity:
Looking past their real estate portfolio, their private equity portfolio grew revenues over 20% YoY! With input costs rising due to inflation over the last year, it is impressive that their portfolio companies were able to pass along increased costs so well and still maintain strong revenue growth.
While liquidation of their positions could be pushed out due to multiple compression across the industry, we believe their valuation techniques going into these acquisitions were extremely conservative thereby removing the risk of any markdowns of their positions in "poor" macro environments like this.
What's Next For The Stock:
While BX is surely a riskier play now than it was a year ago, their business is one of the strongest in the world.
They've not only outperformed the market in most years, but they also have situated themselves to not be exposed to most macro pressures.
If there was ever a golden example on how to run an investment company, BX would be the model citizen.
We continue to love the stock and believe they will be one of the best growing companies, at their risk level, over the next several years.
Therefore we are reiterating our overweight rating and increasing our price target to $171.
Price Target: $172 (30% upside)
Current Price: $132
Target Date: Q3 2022
Rating: Overweight
Risk/Reward: Medium-High / High
Ticker: BX
Market Cap: $158B
Dividend Yield: 3.07%