2023-04-14 18:50:33 ET
Summary
- BlackRock has shown consistent growth, with $110 billion in net inflows, 5% annualized organic asset growth, and 1% organic base fee growth.
- BlackRock's commitment to technology, such as the Aladdin platform, and private market growth potential strengthen its prospects for future expansion.
- BlackRock is well-positioned to profit from the shift towards fixed-income investments and industry growth trends.
Thesis
Despite its impressive growth and profitability figures, BlackRock's ( BLK ) recent performance has initially raised doubts for me concerning the company's future prospects. With macroeconomic and competitive pressures reducing revenue streams while shrinking operating margins, I examined the company's latest earnings report to look for what could potentially jeopardize BlackRock's long-term dominance. This analysis will attempt to uncover these hidden factors that may impede the firm's continued success in the marketplace.
BlackRock's Bear Case Post Q1 2023
We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist. - Warren Buffett
BlackRock's marked revenue decline should be cause for alarm. Management attributed it to lower markets and appreciation of the US Dollar during the past year, both factors having direct ramifications on its average assets under management (AuM) and performance fees which play key roles in revenue generation, serving both investors and shareholders, like myself, alike.
From my perspective, the present market conditions and competitive investment environment have caused a steep 17% decline in operating income and earnings per share from this time last year. This alarming downturn of key financial indicators could frighten potential investors and put BlackRock's status on unstable ground by deterring new investments necessary to maintain its position in the market.
Furthermore, the drop of BlackRock's operating margin by 380 basis points should serve as another warning signal. This decline, likely caused by market and foreign exchange movements on quarterly revenue figures, could erode profitability levels significantly - this in turn would affect its ability to reinvest back into their business and maintain growth momentum. And due to its interdependence, I must stress the danger that the financial sector could be seriously impaired by regional banking turbulence and stress caused by imprudent fiscal and monetary policies - something BlackRock relies heavily on; any adverse changes could potentially compromise results significantly.
In my estimation, the Federal Reserve's swift rate hikes in combination with wavering assurance in regional banks and rising inflation could have a detrimental effect on BlackRock's financial stability. These aspects impact not only consumer sentiment but also hamper BlackRock's reliance upon the ETF market, which is becoming more competitive by the day - potentially posing a dilemma for their chances of growth.
Lastly, BlackRock's financial performance depends heavily on market conditions and execution risk in inorganic growth initiatives like acquisitions. While previous acquisitions may have proven fruitful for BlackRock, future deals could potentially not integrate seamlessly or deliver expected synergies, potentially jeopardizing its overall performance and challenging BlackRock in maintaining its competitive advantage while consistently rewarding investors with returns.
Industry Outlook
Generally speaking, I'm optimistic about the growth of assets under management, which increased by 12% globally to reach $112 trillion. This growth rate is higher than the historical average of 7% annually for the period 2001-2020, and it is mainly driven by strong market performance and net new asset flows from retail investor demand.
North America dominates asset management globally with over 90% of total AuM located within its borders; over one-third (or $6.4 trillion in value growth) being attributable to quantitative easing, consumer spending growth, and historically low unemployment rates. And Overall, AuM growth is forecast by PwC for continued annual increases of 7% between 2021-2025.
Peer Evaluation
With a forward P/E ratio of 19.36, it's clear that BlackRock's earnings command a modestly expensive valuation on Wall Street due to its strong brand recognition, market position, and growth potential.
BlackRock stands out among its peers with a price-to-sales ratio of 5.66 which is relatively higher compared to some competitors but lower compared to others, and an asset valuation ratio of 2.66 that indicates more market appreciation for its assets over those held by competitors.
BlackRock's revenue growth is projected for an increase of 1.20% next year; which falls well short of peers. Yet the company still managed an annual compound average growth rate of 7.12% over three years and 5.62% over five, reflecting their strong brand and market presence that enabled it to attract both new clients while keeping old ones happy.
BlackRock also achieved strong EBIT and net income growth over the last three years at compound annual average annual rates of 4.96% and 4.98%, proving their ability to remain profitable despite volatile market conditions, as evidenced by robust gross profit and EBIT margins that demonstrate operational efficiency.
BlackRock may boast lower net income margins when compared with its peers; however, both its return on equity and return on assets outshone them; this demonstrated greater profits from investments owned by it, giving investors like myself confidence that BlackRock can deliver solid returns over time.
Overall, my analysis indicates that BlackRock is fairly valued relative to its peers. While its P/E ratio may appear high initially, its mixed performance on other valuation metrics indicates it does not exceed reasonable valuation thresholds.
BlackRock's Bull Case Post Q1 2023
It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price. - Warren Buffett
BlackRock has consistently proven itself as a leading global investment management firm, with recent reports showing $110 billion in net inflows, 5% annualized organic asset growth, and 1% organic base fee growth. I believe these figures indicate an increasing level of client trust and loyalty, as more investors consolidate their portfolios with the company.
Diversified Platform
One of the main drivers of BlackRock's growth is its diversified platform, which offers a wide range of financial services and products, including ETFs, advisory, outsourcing technology, and active and private markets capabilities. From my perspective, this platform's resilience during market volatility is exemplified by the $34 billion in net inflows generated by BlackRock's bond ETFs, showcasing the firm's overall strength and adaptability in challenging market conditions.
Expanding Client Base
As more investors flock to BlackRock's bond ETFs and offerings, I believe their growing client base exemplifies BlackRock's ability to attract new clients and increase its market share. Their cash management growth, with $40 billion coming through BlackRock's cash management strategies in March alone, further illustrates their products for cash and liquidity management being popular choices among investors.
BlackRock stands to gain from this trend as more institutions outsource their investment processes to it. Furthermore, its extensive resources, expertise, and local presence put BlackRock in an excellent position to capitalize on it.
Investment in Technology
BlackRock's commitment to technology is paying dividends, evidenced by record net sales on its Aladdin platform in 2022 and ongoing low to mid-teen ACV growth over time. Aladdin platform forms part of their strong business model which delivers value to both clients and shareholders - helping clients manage portfolios more effectively while driving superior ETF performance & leadership, particularly among bond ETFs - this bodes well for future expansion of this innovative solution provider.
Private Markets Growth Potential
BlackRock stands in a strong position with $33 billion invested into their clients' alternative strategies, promising significant growth over time. This capital could become an enormous source of base and performance fee profits that strengthen BlackRock's prospects in the years ahead - I see this development as particularly promising moving forward.
Beneficiary of Fixed Income Reallocations
BlackRock stands to profit from the current shift toward fixed-income investments with its $3.3 trillion fixed and cash platform, strong performance, and wide product offering. Not only can BlackRock take advantage of reallocation opportunities within fixed income investments but its unique technology capabilities help it to seize market dislocations quickly to expand technology capabilities or explore inorganic growth prospects which sets it apart from competitors.
Takeaway
In conclusion, BlackRock remains a sound investment opportunity and should be given strong consideration as a "buy." Despite market turbulence and foreign exchange losses which have caused some decreases in revenue and operating income, its reputation as an authoritative entity within the industry, along with its potential for growth, and profitability metrics all make it worthy of even a slight premium valuation.
For further details see:
BlackRock: A Sound Investment Opportunity Despite Market Turbulence