AI Partnership With Microsoft And Preqin Acquisition Will Strengthen Private Markets Capabilities

Key Takeaways

• Acquisitions and strategic partnerships in private markets and infrastructure are set to enhance revenue and expand BlackRock's investment capabilities.
  
• Integration of public and private markets supports growth in assets under management and boosts net margin potential.
  
• Regulatory changes, economic conditions, and competition could pressure BlackRock's earnings, margins, and growth due to fluctuating taxes, expenses, and institutional net flows.

Catalysts

A publicly owned investment manager.

• BlackRock's acquisition of Global Infrastructure Partners (GIP) is expected to significantly boost management fees, enhance its private markets capabilities, and potentially increase the company's overall effective fee rate, positively impacting future revenue and earnings.
  
• The strategic focus on private markets and infrastructure, combined with initiatives like the AI infrastructure investment partnership with Microsoft, is poised to broaden investment opportunities and drive significant revenue growth over the long term.
  
• The planned acquisition of Preqin aims to advance BlackRock's data and analytics capabilities in private markets, enhancing their client offerings and supporting future revenue growth and operating leverage.
  
• Strong growth in organic base fees, driven by record net inflows and expanding business lines like Aladdin and iShares, suggests a continued path to meeting or exceeding targets for organic base fee growth, positively impacting revenue and earnings growth visibility.
  
• BlackRock's strategy of integrating public and private markets through model portfolios and strategic partnerships positions the company to capitalize on emerging trends in wealth management, potentially driving significant additions to AUM and higher net margins.

Assumptions

• Analysts are assuming BlackRock's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.4% today to 31.1% in 3 years time.
• Analysts expect earnings to reach $8.6 billion (and earnings per share of $55.22) by about December 2027, up from $6.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.7x on those 2027 earnings, down from 26.8x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Risks

• Increasing regulatory scrutiny and changes in tax legislation could impact BlackRock’s future earnings and net margins. The mention of a 25% projected tax rate, with adjustments for discrete items, highlights the potential for fluctuation based on legislative changes or nonrecurring items.
  
• Elevated expenses related to incentive compensation, technology investments, and the integration of recent acquisitions like Global Infrastructure Partners could pressure net margins if revenue growth does not keep pace.
  
• A reliance on institutional net flows, which can fluctuate based on market cycles, presents a risk to consistent revenue growth. Institutional investors might adjust allocations or rebalance portfolios, impacting BlackRock’s asset base.
  
• Economic downturns or shifts in central bank policy could reduce net inflows into both public and private markets, impacting BlackRock’s revenue from management fees as well as its organic growth trajectory.
  
• Competition within the asset management industry, including emerging technologies and alternative investment platforms, could pressure BlackRock’s fee structures and, consequently, its earnings and net margins.

Valuation

• The analysts have a consensus price target of $1118.59 for BlackRock based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1245.0, and the most bearish reporting a price target of just $914.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $27.6 billion, earnings will come to $8.6 billion, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of $1049.22, the analyst's price target of $1118.59 is 6.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.