BlackRock, Inc.

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

BlackRock is a leading publicly traded investment management firm, providing a diverse range of investment management services to institutional and retail clients globally, and is heavily reliant on recurring fees.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BlackRock’s economic moat stems from a combination of intangible assets, switching costs, and scale efficiencies.

  • Intangible Assets: BlackRock benefits from brand recognition and reputation due to its name and decades of experience.
  • Switching Costs: Many of BlackRock’s clients, especially large institutional clients, are reluctant to switch asset managers due to high switching costs such as the process of analyzing many competitors and then moving huge amounts of money to the new manager. These costs also include risk, and trust-based relationships. Once a client moves to a particular investment firm, they rarely switch to another one unless that first firm does something egregiously incorrect or immoral to the client.
  • Scale Efficiencies: With approximately $10 Trillion assets under management (AUM) BlackRock can offer lower fees and broader product offerings to clients, and has a higher leverage to bargain with vendors.

This combination creates a strong competitive advantage, allowing BlackRock to generate above-average returns on invested capital (ROIC). Hence, I’m going to give it a score of 4 out of 5 for the moat. It is not a monopoly or oligopoly, rather, they operate in a competitive field. Also, there is constant disruption in technology/fintech firms as well as new investment approaches and methods by competitors, which poses a major long term challenge and risk to the company.

The main risks that BlackRock faces:

  • Market Volatility: Sudden market declines can lead to lower AUM, and reduced income from advisory and administration fees. The company has historically seen large price swings based on market sentiment and expectations. The stock price is extremely sensitive to global financial issues and the performance of the stock market in general.

For the nine months ended September 30, 2024, BlackRock saw an approximately $150 billion decline in AUM, primarily from “net outflows from equity and fixed-income strategies and by market depreciation”. This shows that even with a large base of AUM, BlackRock’s revenue and AUM is greatly affected by market activity and sentiment.

  • Competition: Low-cost passive investment products such as index funds and exchange traded funds (ETFs) are gaining market share, posing a long term risk to BlackRock’s pricing power. Also, new firms that offer investment management via technology (so called “fintech”) with lower costs, may create a threat to existing large asset managers.

In response to the threat from low-fee providers, BlackRock has continued to shift its offerings to ETFs, even those that provide lower fees to investors. They have also released a new type of fund that is called “indexed” separately managed accounts that could be cheaper.

  • Regulatory and Legal Changes: Regulations in the financial industry are constantly changing. This will require companies like BlackRock to be nimble and willing to change its operational structure and the risk controls and analysis it conducts. Any new regulation or policy change will have an unexpected impact on the company’s profitability.

BlackRock stated in its latest report that “The Company continues to focus on meeting increasing client and regulatory requirements globally. In particular, the current geopolitical landscape has presented ongoing uncertainty regarding the potential for additional regulatory actions and other changes in financial market infrastructure.”

These risks are somewhat balanced out by its business model and management team which has allowed the company to consistently deliver top-line growth and profitability for years. This gives it a degree of resilience even in turbulent market conditions.

Detailed Explanation of the Business

BlackRock operates as a diversified global investment management company, offering various investment products and services to institutional and retail clients globally.

  • Revenues Distribution:
    • Investment advisory, administration fees and securities lending revenues make up most of the company’s top-line revenues.
    • These revenues are generated through investment advisory services for a wide range of clients including large institutional investors, high net-worth individuals, as well as retail clients via ETFs.
    • These fees are generally recurring in nature.

For the nine months ended September 30, 2024, 71% of BlackRock’s revenues came from these services. - Another small part of the company’s revenues comes from technology services revenues which were about 14% of total revenues. BlackRock offers its technology as a way for other firms to conduct their own investment-management activity. They also utilize this technology in their own platform. - Advisory and other revenue is another section with miscellaneous and more irregular components.

Advisory and other revenue was only 15% of total revenues for the nine months ended September 30, 2024.

  • Industry Trends: The investment industry has been undergoing rapid changes. First, growth in passive investment products such as ETFs. Second, increased fee pressure from investors looking to lower their costs. Third, technology advancements that is giving way to new forms of financial management and wealth management.
  • Margins:
    • In general, the company operates at high margins that are common in the financial industry. Although there are a lot of moving parts in the income statement, the company usually has around 40% operating margins and 20% net margins.
    • In the recent results however, margins are slightly down.

For the nine months ended September 30, 2024, operating margins were 32.5%, and net margins were 12.4%.

  • Competitive Landscape: BlackRock competes in a highly competitive market. Some of its largest competitors are:
    • Investment management giants: Fidelity, Vanguard, State Street, Invesco.
    • Financial services companies: J.P Morgan, Morgan Stanley, Goldman Sachs.
    • Newer tech companies that provide robo-advisor services.
    • Smaller boutique and specialized asset-management firms.
  • What Makes BlackRock Different:
    • BlackRock is the largest asset manager in the world by a large margin, and this gives it scale advantages and a larger presence on the market.
    • It is a leader in technology and uses technology effectively. Its technology is used both in its own business, and is also sold separately to other firms who would like to use it for their own investment business.
    • It is a large and well-diversified portfolio that means that the company does not rely on a single market, or a single sector, for its growth and revenues.

Financials

BlackRock’s recent financials, for the 9 months ending September 30, 2024, reveal several important trends:

  • Revenue: Total revenue was $10.7 billion for the last 9 months. Revenue decreased from 2023 because of falling market valuations which impacted the AUM that generates a large portion of its income.

However, note that its investment advisory, administration, and securities lending revenues increased 2% YoY.

  • Earnings: The company had a net income of $1.4 billion or $9.60 per share for the last 9 months. This was significantly lower than the last year, due in part to the decrease in its revenue from investments.
    • The adjusted EPS, which excludes these investment losses, was $27.06. Still lower than last year.
  • Balance Sheet: BlackRock has a relatively healthy balance sheet but not a fortress balance sheet.
    • Cash and cash equivalents at the end of the most recent quarter were around $14.0 billion.
    • Current Assets are 2.2 times greater than current liabilities.
    • Total debt was $4.4 billion for the period, which is well covered by company’s revenue stream.
    • Debt to total capital is roughly 17%, which is also very conservative. BlackRock is a very well capitalized company.
    • The company is highly profitable with a free cash flow for the 9 months ending September 30th, 2024, of $6 billion.
  • Capital Allocation:
    • BlackRock has a strong capital allocation framework. In the last 9 months, it allocated $1.6 billion for share repurchases and $2.5 billion for common dividends, showing its commitment to providing long term shareholder value.

Understandability Rating: 3 / 5

While the core business of investment management is relatively simple, with the goal of trying to make money for its clients, the financial statements can be quite complex. Some of the information is usually in footnotes that are hard to find if the user does not know where to look. Furthermore, there are a lot of moving parts and accounting measures that need to be analyzed before properly grasping a full view of the company. The company’s financial results can also vary significantly based on the state of the financial markets, so it is more volatile than a regular business.

Balance Sheet Health Rating: 4 / 5

BlackRock has a good balance sheet due to its high profitability and cash balance, and low long-term debt. The debt is also very low risk because there is an extremely strong revenue stream to service any debt obligations. While the company’s business is dependent on the market’s outlook and valuations, the company has always been able to consistently produce returns for investors. The only reason I don’t rate the company a 5/5 is due to the fact that any downturn of assets and prices in the financial market may severely affect company’s financial health in the short term.

Management is aware of the potential impact of market fluctuations, and are focused on reducing the company’s reliance on revenues related to market performance by making its technology business a larger part of its income stream.

Overall management has a long and successful track record of capital allocation and financial planning.

Overall, BlackRock is a large financial firm, that provides a range of investment products and technology, with a solid moat, a strong balance sheet and a management that, so far, has proven capable and diligent. There are legitimate risks that come from the rapidly changing world, market fluctuations, and increasing regulations but the company should be able to mitigate them if it continues to be nimble and innovative. The main downside is that the company is inherently subject to changes in market conditions and sentiments, something that is hard to control for even the most able executives.