Diversification Across Investment Capabilities And Geographies Will Drive Future Success

Key Takeaways

• Diversification and strategic acquisitions in alternative credit and digital infrastructure position Blue Owl Capital for revenue growth and improved service offerings.
  
• Record fundraising and new product launches are expected to enhance earnings by boosting high-yield investments and increasing management fees.
  
• Growth is threatened by market dependency, high investment costs, and potential tax increases, which could all put pressure on earnings and margins.

Catalysts

Operates as an alternative asset manager in the United States.

• Blue Owl Capital's diversification across investment capabilities and geographic footprint suggests a strong potential for future revenue growth by tapping into new markets and client bases.
  
• The company's plans for strategic acquisitions in alternative credit and digital infrastructure are expected to drive revenue growth and enhance their service offerings, potentially increasing net margins through economies of scale.
  
• Record fundraising efforts, with significant increases in equity and debt raising, support the expectation of enhanced future earnings, as these funds will be deployed across high-yield investments, boosting overall returns.
  
• The merger of Blue Owl's publicly traded diversified lending BDCs is anticipated to create significant operational efficiencies and potentially improve net margins, supporting an optimistic outlook for increased earnings per share (EPS).
  
• Launching new products, such as a European net lease strategy and alternative credit products, could significantly boost revenue streams. The potential increase in management fees from these initiatives is expected to impact future earnings positively.

Blue Owl Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Blue Owl Capital's revenue will grow by 19.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 59.6% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $1.22) by about March 2028, up from $109.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, down from 113.2x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Blue Owl Capital Future Earnings Per Share Growth

Risks

• Despite record fundraising and strong deployment, the company's performance is subject to changes in the M&A environment and market conditions, which may impact revenue growth if M&A activity does not materialize as expected.
  
• The reliance and expansion into newer assets like digital infrastructure could pose a risk if market demands shift or competition heightens unexpectedly, potentially affecting net margins on these investments.
  
• The expectation for substantial future deployment of AUM not yet paying fees hinges on favorable market conditions. Any delays or adverse market changes could impact the company's ability to realize anticipated earnings growth.
  
• There is a potential increase in the effective tax rate over the coming years, which could incrementally affect net earnings if the actual rate rises faster or higher than anticipated.
  
• Maintaining high growth rates may require sustained high levels of investment in people and infrastructure (e.g., G&A and comp), which could pressure net margins if revenues do not scale proportionately.

Valuation

• The analysts have a consensus price target of $26.75 for Blue Owl Capital 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 $32.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 7.3%.
• Given the current share price of $19.83, the analyst price target of $26.75 is 25.9% higher.
• 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.