Overvaluation Will Intensify Fee Erosion Amid AI Disruption

Key Takeaways

• The shift toward passive investing, fintech disruption, and increased direct market access are eroding Lazard's traditional fee-based revenue streams and advisory relevance.
  
• Rising regulatory demands, talent dependency, and compensation pressures are putting additional strain on margins, stability, and the company's long-term earnings outlook.
  
• Expansion in talent, digital innovation, diversified services, and geographic reach are strengthening Lazard's client base, operational efficiency, and revenue stability across market cycles.

Catalysts

Operates as a financial advisory and asset management firm in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

• The ongoing global shift towards passive investment vehicles and the accelerating dominance of ETFs are expected to erode Lazard's traditional asset management fee pool, particularly as client demand moves away from active equity strategies and toward lower-margin products; this will put substantial and persistent pressure on asset management revenue and fee sustainability.
  
• The increasing adoption of artificial intelligence and fintech solutions, both within and outside the advisory sector, is likely to further disrupt Lazard's differentiated advisory model, commoditizing core services, pressuring fees, and threatening Lazard's ability to maintain revenue growth and defend net margins over the long term.
  
• Lazard's business model remains heavily reliant on experienced rainmakers and senior bankers, creating key-person risk and challenges in talent retention; this reliance threatens deal flow consistency and earnings stability, particularly given the ongoing industry-wide war for advisory talent and rising compensation costs compressing net margins.
  
• Rising global regulatory scrutiny and tightening compliance requirements are set to increase operating costs for both advisory and asset management divisions, which in combination with already elevated compensation ratios, are poised to weigh further on profit margins and overall earnings trajectory.
  
• The long-term trend of direct capital market access-such as direct listings, private placements, and SPACs-reduces the addressable market for traditional M&A and advisory services, significantly undermining Lazard's future advisory revenue potential as corporates and financial sponsors increasingly circumvent external advisors.

Lazard Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lazard compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lazard's revenue will grow by 9.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.9% today to 16.6% in 3 years time.
• The bearish analysts expect earnings to reach $665.0 million (and earnings per share of $5.57) by about August 2028, up from $302.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 16.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 4.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

Lazard Future Earnings Per Share Growth

Risks

• The ongoing globalization of corporate activity and increasing complexity of cross-border M&A is fueling robust demand for Lazard's advisory services, as demonstrated by record first-half advisory revenues and strong geographic diversity, which can support sustained growth in advisory revenue and fee income.
  
• Lazard's persistent investment in strategic hiring-including a successful effort to expand its managing director ranks and specialist sector teams-is enhancing its talent pool, strengthening client relationships and deal origination, and positioning the firm to stabilize or increase revenue and earnings over time.
  
• The firm's asset management business is showing signs of a structural inflection point, marked by record gross inflows, a growing backlog of unfunded mandates, and a diversification into active ETFs and global/emerging market strategies, all of which could drive higher assets under management and contribute to rising management fee revenue.
  
• Lazard's adoption of advanced digital and AI-powered advisory tools, coupled with a proactive cultural shift to embrace technological transformation, is expected to improve deal efficiency, productivity, and client engagement, thereby positively impacting net margins and profitability.
  
• The diversification of Lazard's advisory revenue mix-moving towards a robust balance of M&A and non-M&A activities such as restructuring, liability management, fundraising, and capital solutions-reduces cyclicality and provides resilience across market cycles, contributing to revenue stability and potentially smoothing earnings volatility.

Valuation

• The assumed bearish price target for Lazard is $47.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Lazard's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $47.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.0 billion, earnings will come to $665.0 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $51.8, the bearish analyst price target of $47.0 is 10.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.