Is Blackstone Stock Overvalued?

Blackstone Inc (NYSE:BX) is a major investment management company that’s involved in private equity, commercial real estate, and more. Combined, it holds over $730 billion in assets under management.

So, is Blackstone Group overvalued?

Although a large company, it takes on significant risk as part of its leveraged buyout strategies. In many ways, the financial industry of the 2020s is mirroring the lead-up to the 2007 market crash. Commercial real estate struggled during the pandemic, and many businesses are still leveraging virtual workers while de-prioritizing corporate offices.

Companies like Blackstone could face higher exposure than investors currently estimate, especially with the Federal Reserve tapering, interest rates rising soon and government money slowing. Investors jumping in today could experience a muted ROI versus those who jumped on board even a year ago.

Blackstone 101

Blackstone is a New York City-based investment firm founded in 1985 by Lehman Brothers employees Peter Peterson and Stephen Schwarzman. Initially an M&A advisory agency, it expanded to become a merchant bank and investment management firm.

The company has investments in a diverse group of assets, such as Ancestry.com, Freescale Semiconductor, and Vivint. It’s especially involved in major real estate developments, such as Hilton Worldwide, SeaWorld, La Quinta Inns & Suites, and Motel 6.

Arguably this puts the company in a precarious position with exposure to tourism and travel when lockdowns are still in effect in many parts of the world. Travel restrictions and social distancing guidelines seriously crippled hotel vacancy rates, and McKinsey estimates revenue per available room could still be down 20 percent through 2023.

Bearish analysts believe this could be a sign Blackstone is overvalued, but is it?

Is Blackstone Overvalued?

Because the cost of debt has been so cheap, the company has grown its balance sheet. BX has over $7.5 billion in debt on its books, which could act as an anchor as interest rates rise and payments on debt become due, particularly on variable rate loans.

Blackstone stock is trading at over 20x earnings, a hefty premium for a company that is not exclusively technology focused. Some analysts believe that BX share price will suffer from a price adjustment soon, especially considering its nearly 300-percent price rise since January.

Using a discounted cash flow analysis forecast, BX is fairly valued and has some downside potential to $126 per share based on its price at the time of research. The company’s $2.80 annual dividend yield, which works out to about 2.25 percent, won’t compensate for the downdraft in share price should it materialize.

Nevertheless, Blackstone holds a lot of weight in its industry and has a lot of buying power. Its leveraged buyout strategy has allowed it to grow its portfolio through the pandemic when prices were destabilized in commercial real estate.

Blackstone Vs BlackRock

Because of their similar names and industries, some confuse Blackstone with BlackRock, Inc. (NYSE:BLK). In fact, Schwarzman and BlackRock CEO, Chairman and co-founder named them similarly on purpose when the firm branched out from Blackstone.

Although they’re both large companies, they’re very different in size. Blackstone has over $730 billion in assets under management, compared to BlackRock’s $9.6 trillion in assets under management.

BlackRock is the largest money manager in the world. The enormous amounts of assets under management by both firms are not indicative of their respective future growth opportunities. BlackRock surprisingly outgrew Blackstone since it branched out as a standalone company, but it will likely experience a slower pace of growth going forward due to its size.

Will Blackstone Stock Go Up?

Blackstone more than doubled its assets under management over the past two years with the help of aggressive monetary policy that stimulated asset prices. Third quarter earnings of $1.4 billion were nearly double last year’s report of $794.7 million in the same period.

The big rebound in share prices hasn’t stymied the continued purchase of big-name acquisitions, like a majority stake in $1.2 billion women’s clothing brand Spanx, as well as real estate on the Las Vegas Strip and Hollywood sound stages and facilities.

This diversified portfolio should position the company well as travel and entertainment content continue to grow. However, today’s investors should expect to have a much lower return on equity due to the possibility of a revaluation over the coming quarters.

Certainly, Blackstone has had a stellar record of creating value but flies in the ointment could be in the offing.

Risk Factors

The past couple of years have spotlighted the risks to Blackstone’s investments, as many of its portfolio companies got brutally hit by the COVID-19 lockdowns. Vacations and travel plans stalled, and that left the hospitality and tourism industries struggling. Even the retail sector struggled, bottlenecking the firm’s growth potential longer than most.

Its lack of COVID resistance is made even riskier by the high debt load it maintains to continue running its business.

Until the coronavirus is better contained, the company remains at high risk of its companies flatlining. This could take at least another year, and that means Blackstone could be susceptible to major drawdowns in AUM. Should they occur, it would be detrimental to investors, especially those coming in at over 20x P/E.

Is Blackstone Overvalued? The Bottom Line

Blackstone share price had a rough ride over the past few years thanks to heavy exposure in heavy-hit industries like hospitality and retail. However, it showed strong gains throughout the past year and tripled in price after a strong run of acquisitions and increased revenue.

It’s a steady dividend-paying stock that paid shareholders $3.57 per share over the past twelve months, and it made some strategic investments that could pay off in the long run.

However, it’s a risky portfolio in an uncertain economy. Indeed, many of Blackstone’s brands are susceptible to global restrictions in tourism and entertainment, and could face even harder times over the next two years. This road ahead could be rocky for investors and not even top tier management may be able to navigate the choppy waters without getting wet.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.