At $702, BlackRock Stock Is On The Higher Side

[Updated 03/08/2021] BlackRock update

Having gained around 114% since the March 23 lows of last year, at the current price near $702 per share, we believe BlackRock’s stock (NYSE: BLK) is trading above its short-term potential. BLK, the asset management behemoth, has seen its stock increase from $327 to $702 off the 2020 March bottom compared to the S&P 500 which increased almost 70% – the stock is leading the broader market by a huge margin and has gained 49% over the last twelve months. While the earnings beat in each of the last four quarters lifted investor confidence in the stock, the company also benefited from headwinds in other industries due to the Covid-19 crisis, which positioned BLK stock as a better investment.

BlackRock reported strong Q4 2020 results, with the company surpassing revenues and earnings consensus estimates. It reported total revenues of $4.47 billion, up 13% y-o-y. This improvement can be attributed to a 10% increase in base fees coupled with a significant jump in performance fees. Further, the company reported $127 billion in net inflows for the quarter, taking its total Assets under Management (AuM) figure to the record height of $8.68 trillion. On a similar note, BLK’s full-year 2020 revenues grew 11% y-o-y to $16.2 billion, mainly due to growth in AuM, which resulted in higher base fees and a jump in performance-related revenues.

Although BlackRock reported strong fund inflows and revenue growth in 2020, the growth was also due to several external factors. Market volatility due to the economic slowdown and headwinds in industries like manufacturing, energy, oil, hospitality, travel, real estate, etc. played a major role in diverting investor funds toward BlackRock. That said, given the expected mass availability of the Covid-19 vaccine and potential recovery in the economy, investor funds are likely to re-divert to traditional industries. This will likely restrict BlackRock’s revenues in the short term, negatively impacting its stock price. Additionally, BlackRock’s P/E multiple changed from just below 15x in 2018 to close to 23x in 2020. While the company’s P/E is around 22x now, this leaves some scope for downside when the current P/E is compared to levels seen in the past years – P/E multiple of around 18x at the end of 2019 and 15x at the end of 2018. Our dashboard “What Factors Drove 79% Change In BlackRock Stock Between 2018-End And Now?” provides the key numbers behind our thinking.

[Updated 12/29/2020] BlackRock Stock Rally Is Unsustainable

After gaining more than 100% since the March 23 lows of this year, at the current price of around $710 per share we believe BlackRock stock (NYSE: BLK) has achieved its near-term potential. BlackRock, the world’s largest asset manager, has seen its stock increase from $327 to $710 off the recent bottom compared to the S&P 500 which increased almost 65%. The stock is leading the broader markets by a huge margin and is up 41% YTD. This could be attributed to better than expected results in each of the last 3 quarters mainly driven by the recovery in global financial markets which improved the asset valuations and attracted more funds. Further, BlackRock revenues have grown 11% to a consolidated figure of $11.73 billion for the last 3 quarters from the consolidated figure of $10.56 billion for the year-ago period.

While BLK revenue growth was slow over 2018-2019, its P/E multiple has increased. We believe the stock has reached its near term potential and is unlikely to see much upside after the recent rally and potential weakness from a recession-driven by the Covid outbreak. Our dashboard Why BlackRock Stock Moved 78% Between 2018-End And Now? provides the key numbers behind our thinking.

BlackRock’s revenues increased 2% over 2018-2019, which translated into a 4% gain in net income figures over the same period. This led to an increase in the EPS figure from $26.86 to $28.69.

During the same period, the P/E multiple increased from just below 15x to close to 18x. The multiple further increased in 2020 as the company has outperformed earnings estimates over the last three quarters. While the company’s P/E is just above 25x now, there is a potential downside when the current P/E is compared to levels seen in the past years – P/E of close to 18x at end of 2019 and 17x at the end of 2017.

Where Is The Stock Headed?

BlackRock nine months cumulative revenues for 2020 have increased by 11% y-o-y, while its stock is up 38% YTD. Although the positive revenue growth did help in shaping a favorable investor sentiment toward BlackRock, it was also due to headwinds in other industries like travel, hospitality, energy, real estate, automotive, etc., which made the stock a better investment opportunity for investors. However, with Pfizer and Moderna’s Covid-19 vaccines receiving emergency FDA approval, it is likely to divert investor money back to other industries. Overall, the BlackRock stock is unlikely to see significant upside in the near term.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

While BlackRock stock may not be attractive, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Dow Inc. vs. Altice USA shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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