Blackstone Sees AI Pivot Paying Off

Blackstone is experiencing a significant boost in its earnings, attributing much of this success to its strategic pivot towards artificial intelligence. In a recent interview, the firm's CEO highlighted the company's strong quarterly performance, with earnings up 26% following a 25% increase in the prior quarter. This surge is directly linked to Blackstone's decision to heavily invest in the AI ecosystem, a strategy that began in 2021 with the acquisition of a data center business. This move provided a "front row seat" to the evolving AI landscape, prompting further investments in neo clouds, large language models, electrical equipment, and energy.

AI Investments Yield Strong Returns

The company's commitment to AI is evident in its recent partnerships, including collaborations with Google for TPUs and Nvidia for financing chips, as well as with Broadcom. Blackstone has also seen substantial returns from its AI-related assets, announcing the sale of data centers for $8 billion and a battery storage company for $7 billion in recent weeks. These realizations underscore the financial benefits of the firm's strategic pivot.

Blackstone's Valuation Debate

The CEO expressed his belief that Blackstone is currently one of the most undervalued ways to play the AI trend. He argues that the firm, which operates with virtually no capital and minimal debt, demonstrates incredible growth and a 4% dividend yield, yet trades at a discount compared to tech multiples. He suggested that Blackstone should be valued more akin to technology giants like Nvidia or Alphabet Inc. (NASDAQ:GOOGL), anticipating that market perception will eventually align with the firm's earnings power and growth potential.

Addressing Concentration Risk and Market Pushback

When questioned about potential concentration risk associated with its AI focus, the CEO emphasized Blackstone's diversified portfolio, which includes substantial real estate, secondary investments, hedge funds, credit, and traditional businesses like Jersey Mike's. He also highlighted the global nature of the firm's operations. Regarding market concerns about hyperscaler capital expenditure, Blackstone stated that it is not observing a slowdown. In fact, the firm is on pace to lease significantly more data center capacity this year than in previous years, with development driven by demand and long-term contracts from creditworthy companies.

The CEO also touched upon the growing use of AI in business, noting its application in customer service, coding, and revenue generation. He believes there is an underestimation of the technology's power and its potential to create new business lines. On the topic of Chinese open-source LLMs, Blackstone's team is exploring various models, with the CEO anticipating a range of offerings from high-performance frontier models to more accessible options. He also noted that lower compute costs could further drive demand, potentially increasing pressure on energy and data center needs, and emphasized the growing role of AI in the physical world with autonomous vehicles and robotics.

Non-AI Investments and Market Outlook

Despite the focus on AI, Blackstone continues to see opportunities in traditional investments. The firm noted a bifurcation in liquidity, with strong interest in "AI-unaffected" businesses like medical supplies and fast-food chains. Real estate, particularly in logistics, is also performing well, with potential M&A activity noted. However, liquidity is tighter for businesses in areas like professional services and information technology where future uncertainty is higher.

Looking at macroeconomic signals, Blackstone acknowledges the impact of geopolitical events and elevated interest rates on market activity. However, the firm remains optimistic, citing subdued inflation away from energy prices and strong revenue growth within its portfolio companies. Their inclination is to deploy more capital when others pull back, driven by healthy fundamentals and the anticipated productivity gains from AI investments.

Credit Redeems and Future Flows

Blackstone reported that redemption requests in its credit division have slowed. While acknowledging muted inflows in private credit due to market noise, the firm remains confident in its long-term strategy. They believe that as the market better understands the stability of private credit, and as base rates normalize, flows will resume. The firm's wealth management franchise, in particular, is experiencing significant growth, with strong inflows into private equity and infrastructure products.