Why Blackstone Stock Is Still A Sell After Q4 Results (NYSE:BX)

Blackstone (NYSE:BX) is the world’s largest alternative asset manager with over $1 trillion in assets under management. It benefits from this immense size through several key competitive advantages that have enabled it to deliver phenomenal long-term total returns for shareholders:

1. Name brand: clients are more willing to invest with an alternative asset manager with the name recognition, track record, product variety, and prestige of BX.
2. Business network: BX is able to access unique and oftentimes exclusive deals and get bargains that it wouldn’t otherwise be able to command if it were not for its global presence and extensive history, during which it has built up a large number of business relationships.
3. Proprietary data: Through its huge scale, global presence, and diversified portfolio of alternative investment products, BX has a treasure trove of proprietary macroeconomic and industry-specific data that it can leverage to enhance its investment decision-making and business operating processes.
4. Massive scale: Given that its size is unmatched in the alternative asset space, it can often invest in deals that most of its competitors cannot even bid on, thereby getting better deals than it would otherwise.

However, about a month and a half ago, I turned bearish on the stock for two main reasons:

1. Valuation: BX stock had become slightly overvalued after a strong run in its stock price relative to growth in its underlying earnings power.
2. Macroeconomic Headwinds: The high likelihood of a recession hitting in the near future meant that BX may face some fundraising and performance-related fee headwinds. This will hurt BX’s growth in fee-related earnings while also reducing its dividend payouts due to weaker realizations of performance-related fees.

While my concerns initially seemed validated as BX’s stock fell in the weeks following my downgrade and also meaningfully lagged the broader S&P 500 (SPY) as well as near-peer Brookfield Asset Management (BAM) over that period:

However, BX’s Q4 results and recent economic data seemed to deal a blow to my thesis that the economy is headed for recession and BX stock is overvalued, and BX stock shot up in response:

That being said, I still believe that – recent positive economic news and strong BX results notwithstanding – BX warrants a Sell rating right now. In this article, we discuss the Q4 results and detail why the stock is a Sell right now.

BX Stock’s Q4 Results

BX’s Q4 results were overall quite positive. In particular, its inflows increased substantially, bringing total assets under management to a whopping $1.04 trillion and Fee-earning assets under management to $762.6 billion. Moreover, distributable earnings per share increased from $0.94 to $1.11 sequentially, good for 18.1% quarter-over-quarter growth.

That being said, the quarter was not entirely positive as year-over-year quarterly growth was less impressive, coming in at a milder 3.7%. Even more concerning was that one of BX’s most important investment fund strategies – real estate – generated negative returns during both the fourth quarter and the full year, even as virtually every other business category delivered positive returns in 2023 and only one other category generated a loss in Q4.

This poor outcome for real estate prompted an analyst on the earnings call to question the sustainability of institutional and retail appetite for that strategy moving forward. Management did not exactly sound optimistic either in its response to the question, stating that:

Real estate…will have a number of negative headlines coming out over the course of the year. And so, what happens is, I think investors tend to take their time in terms of pivoting back to the space…so, there’s caution… it will take a bit of time on both the institutional and the individual investor side…it will take multiple quarters of strong performance where people say, hey, I’m comfortable doing this.

If this indeed proves to be the case, it could weigh heavily on BX’s growth and performance-based earnings given that real estate makes up a whopping 39.2% of its fee-earning assets under management and 45.7% of its permanent capital assets under management.

Moreover, fee-related earnings – the most important type of cash flow as it is the most durable and sticky from quarter to quarter – declined on a per-share basis from $0.92 to $0.86 sequentially and from $0.88 in Q3.

As a result, while the acceleration in fundraising and overall solid performance across its portfolio bodes well for future growth, BX is still battling significant headwinds in its largest single business (real estate) that will likely weigh on overall results for quite some time as per management’s own commentary.

Other Reasons To Be Bearish On BX Stock

Given the meaningful challenges confronting its real estate business, BX stock still looks overvalued right now, as its forward P/E ratio of 24.79x is way above its average of 15.64x over the past decade and its NTM dividend yield of 3.42% is way below its 10-year average of 5.77%.

Moreover, interest rates remain quite elevated, making the premium valuation look even steeper, and – while recent GDP, inflation, and jobs data imply a goldilocks outlook for the U.S. economy – leading recession prediction models such as the Yield Curve model and the State Coincidence Index model indicate a high risk of recession hitting the economy in the near future. As a result, we do not see the risk-reward for BX stock at its current valuation as being particularly attractive.

Furthermore, recent news reports indicate that BX’s CEO remains very close with Chinese leadership and appears set to double down on his investments in the country, further increasing BX’s risk in the current environment and prompting us to grow even more bearish on the stock at its current price. While BX does not disclose its AUM exposure to China in its filings, it is evident that the company has a substantial – and growing – presence in the country. Here are the clues:

• China is mentioned 32 times in BX’s most recent annual report.
• BX has scores of subsidiaries/funds based either in Asia, or explicitly China itself.
• The company’s risk disclosures repeatedly refer to China, indicating that any escalation of complications between the U.S. and Chinese economic relations could meaningfully disrupt BX’s business operations. For example:

In China, the government has in recent years implemented a number of measures to control the rate of economic growth in the country, including by raising interest rates and adjusting deposit reserve ratios for commercial banks, and through other measures designed to tighten credit and liquidity. The China growth rate has been slowing, and further slowing could have a systemic impact on the global economy and on equity and debt markets.

Also:

the ability to deploy capital in China has been adversely impacted by policies and regulations in China and the U.S. This may be exacerbated prospectively. For example, the U.S. House of Representatives passed a bill that, if enacted its current or a similar form, would subject certain outbound investments from the U.S. into China to heightened review by the U.S. government. As a related matter, certain senior administration officials have indicated that the current administration is formulating an approach to address outbound investments in sensitive technologies. There is public speculation that this formulation will involve an outbound investment screening mechanism, particularly relating to China and China-adjacent investments, which could further negatively impact our ability to deploy capital in such countries.

• Key personnel at BX have significant ties to China. For example, Board Member James W. Breyer has a long record of investing in China and partnering with Chinese entrepreneurs. Moreover, he is Co-Chairman of IDG Capital, based in Beijing and the first firm to bring venture capital into China. He is also currently the Chairman of the Advisory Board at the Tsinghua University School of Economics and Management (located in Beijing, China).

• Most significantly of all, BX CEO Steve Schwarzman is very closely connected to not only China but also to key leaders in the CCP, and seems to be getting even more closely connected with them in recent months. This past November, he was one of a handful of CEOs who sat at the same table as CCP leader Xi Jinping when he spoke in San Fransisco as part of a diplomatic mission aimed at restoring the confidence of Western businessmen in China’s economy. Then earlier this week, he met with China Premier Li Qiang at the World Economic Forum in Davos, Switzerland, and also interfaced with the Governor of China’s central bank and other members of China’s government. Then in an interview with CNBC this week, he defended the CCP and China as a good place to invest right now, calling them “very pro-business,” referred to the CCP party Secretary in Shanghai as “an old friend of mine,” and said he believed CCP party officials because he “knows them” when they said their economy is growing at 8.2% annually instead of the much lower officially reported figure. He also has a significant philanthropic stake in China. As reported in BX’s latest annual report:

In 2013, he founded an international scholarship program, “Schwarzman Scholars,” at Tsinghua University in Beijing to educate future leaders about China. At over $575 million, the program is modeled on the Rhodes Scholarship and is the single largest philanthropic effort in China’s history coming largely from international donors. Mr. Schwarzman is Co-Chair of the Board of Trustees of Schwarzman Scholars.

• Nikkei Asia also reported that BX is “homing in on Asia” to fuel its future growth, raising billions of dollars for funds that focus on investing in the region (including China), and BX President and COO Jonathan Gray stated that BX has a “long-term commitment to Asia” including a focus on China given that it “will grow to be the largest economy in the world.”

This all adds up to signal an apparent strong and growing tie between China’s economic well-being and BX’s well-being. BX’s leadership is very personally and professionally invested in the country and has close relationships with leading figures in the CCP. Due to the well-documented geopolitical risks and uncertainties that lead many business leaders and investors to conclude that China is uninvestable, it by extension makes BX a much riskier proposition.

In addition, BX’s fee revenues are becoming increasingly closely tied to public markets. In the event of a war involving China and the United States over Taiwan, global stock markets will likely plummet. This would undoubtedly have a material impact on BX’s fees. As the company stated in its latest annual report:

Turmoil in the global financial markets can…have a material and rapid impact on our mark-to-market valuations, particularly with respect to our public holdings and credit investments...As publicly traded equity securities have in recent years represented an increasingly significant proportion of the assets of many of our funds, stock market volatility, including a sharp decline in the stock market may adversely affect our results, including our revenues and net income.

Investor Takeaway

While BX has delivered phenomenal long-term returns for investors and has built arguably the most impressive alternative investment empire in the world today, its Q4 results – while good on the surface – signal that its core real estate business is quite challenged. Moreover, significant and growing exposure to communist China makes it an increasingly risky bet in the current environment. When combined with the still elevated odds of macroeconomic headwinds and the richly valued stock, we are reiterating our Sell rating on BX and plan to steer clear until there is a substantial margin of safety in the stock’s valuation.