Artificial Intelligence (AI) can potentially revolutionize many industries in the coming years. It could become a huge productivity and profit booster. Those catalysts could drive significant returns for investors in stocks capitalizing on AI.
Most investors currently focus on tech titans developing software and hardware to power AI. That's causing them to overlook many other companies working to capitalize on the AI revolution. One AI-focused company investors shouldn't miss is Blackstone (BX -0.03%). Here's how the leading alternative asset manager is working to capitalize on the power of AI.
AI is making Blackstone an even better investor
Blackstone is a tremendously successful investor. The company recently reached a milestone of having $1 trillion of assets under management (AUM), the first in the alternatives space to reach that mark. The reason clients entrust Blackstone with their capital is its differentiated returns. Over the last 30 years, Blackstone's corporate private equity and opportunistic real estate funds have delivered 15% average annual returns net of fees. That compares to the roughly 10% average annual return for the S&P 500 over that period.
A crucial aspect of Blackstone's success is its data-driven thematic investment approach. CEO Steve Schwarzman noted on the company's recent second-quarter conference call that "we specialize in the production and analysis of enormous amounts of data." He stated, "This process... helps us identify trends before others and adjust where we invest our clients' capital" while enabling it to maintain a hands-on management approach across its portfolio companies.
Blackstone's focus on data led it to start a data science group in 2015 to get in on the ground floor of the AI revolution. Schwarzman noted on the call:
We are rapidly and significantly expanding our capabilities in artificial intelligence. We've been using AI to help improve operations and our portfolio of companies as well as at Blackstone itself. We believe that the new generation of AI has the potential to transform companies and industries. And the timeliness and effectiveness of its implementation will be determinative of who the winners and losers will be.
The company's early investments in AI have already given it a strong competitive position. It should enable Blackstone to further leverage the power of its data to enhance returns for investors in its funds.
Those higher returns will trickle down to Blackstone shareholders through higher fee-based earnings and performance revenues, all of which it will return to investors via dividends and share repurchases. Over the last decade, Blackstone has grown its distributable earnings by 20% annually, double the rate of the market. Meanwhile, the company's total annual dividend payments have grown over 300% in the last 10 years. The company's rapidly growing earnings and dividend payments have helped drive robust total returns for investors (nearly 23% annualized over the past decade, almost double the return of the S&P 500).
Driving demand for its data centers
A key to Blackstone's ability to deliver differentiated returns for its clients, -- which helps drive total shareholder returns -- is its ability to find compelling investment opportunities. Blackstone believes AI will drive new investment opportunities in the future. COO Jon Gray discussed a major AI-driven investment opportunity Blackstone sees ahead on the second-quarter call. He noted:
There will be massive funding needs over the next 15 to 20 years for infrastructure projects globally, notably including digital infrastructure and energy transition, where we are building sizable platforms. First, in digital infrastructure, there is a well-publicized arms race happening in AI. And the major tech companies are expected to invest $1 trillion over the next five years in this area, mostly to data centers.
Blackstone is already well-positioned for this trend. The company acquired data center REIT QTS Realty for $10 billion in 2021. QTS Realty gave Blackstone a platform to capitalize on one of its highest conviction themes: data proliferation. It has turned out to be a well-timed acquisition. Gray noted on the call that QTS is "showing extraordinary momentum with more capacity leased in the last two years than in the previous 17. We expect our investors will benefit significantly from the powerful tailwinds in this rapidly growing sector."
Investments like QTS Realty align with Blackstone's strategy of thematically investing in high-quality assets (properties and platforms) with outsize growth potential powered by strong tailwinds. The company has a phenomenal track record of identifying investment opportunities that deliver outsize returns across many sectors. Notable money-making investments include hotel operator Hilton (it made a $14 billion profit or nearly three times its original investment) and casino property The Cosmopolitan of Las Vegas (a $4.1 billion profit, its best-ever profit on a single property).
AI could further enhance Blackstone's returns.
Considering Blackstone's successful investing history, when it spots an opportunity, investors should take notice. It sees a bright future in AI, which could enable the company to further improve the operations of its portfolio companies. It should also enhance investment returns, especially for funds that own data centers.
Those improved returns could drive faster earnings growth for Blackstone's shareholders in the coming years, potentially empowering it to produce strong total returns. That AI-driven upside potential makes it one stock AI-focused investors won't want to overlook.
