Blue Owl: an AI infrastructure play at half price

I covered a survey on Saturday that said Americans are sick of hearing about artificial intelligence (AI). But unfortunately for all those polled, it’s impossible to escape the topic.

AI is all over the news. It pops up automatically in our searches. And considering that powerful companies are spending hundreds of billions of dollars on expanding it…

It will only get bigger from here.

So will the data centers people are equally sick of. That’s another topic I covered last week: how chunks of those AI-focused fortunes are being spent on infrastructure buildout – much to the chagrin of many a community.

This includes my hometown of Spartanburg, South Carolina, which shot down a data center proposal earlier this year. And it’s hardly alone.

New York Governor Kathy Hochul even recently announced a state-wide, one-year pause on permitting new data centers over a certain size. She wants to first develop a “regulatory framework” that protects residents from increased utility bills and the like.

I could point out how data centers brought in about 95% of Loudon County, Virginia’s 2025 operating needs. One analysis estimated that homeowners would otherwise have had to pay an extra $5,800 every year.

There’s also the Electric Power Research Institute’s findings that data centers helped lower residential electricity rates between 2015 and 2024 by spreading fixed grid costs across larger customer bases.

Then again, I fully acknowledge that power demand, water consumption, and noise pollution concerns should be taken seriously. So let me skip the debate and go right to my main point…

That data center demand isn’t going away.

As such, every time a new proposal is dismissed or delayed, already existing supply becomes that much more valuable. And that, in turn, opens up a very attractive situation for investors to take advantage of.

Anyone paying even minimum attention to Wall Street this year knows the AI trade currently centers around two kinds of companies:

But I’ve got my eyes focused on a different kind of business altogether in Blue Owl Capital (OWL).

One of the world’s leading alternative asset managers right alongside names like Blackstone (BX), Brookfield (BAM), and Apollo (APO), Blue Owl oversees approximately $315 billion in assets for influential clients such as pension funds, insurance companies, sovereign wealth funds, and endowments in the form of:

In and around this, it’s built one of the industry's premier direct lending franchises that produces exceptional long-term credit results. This includes an average annual loss rate of just 0.12%.

Historically, that focus has been one of its greatest strengths. However, investors have become concerned more recently – legitimately so – about how Blue Owl’s private credit portfolio is so heavy on software, technology, and related industries.

They worry that the current AI craze could do a lot of damage, including lowering barriers to entry and disrupting some of Blue Owl’s software as a service (SaaS) clientele… which would then increase their default risk. And so they’ve sent the stock down.

But, as so often happens, the market has taken that negative sentiment too far. They’re putting too much emphasis on possibilities concerning one part of Blue Owl’s business… and ignoring another aspect altogether.

In 2021, Blue Owl made an intensely significant move in acquiring Oak Street Real Estate Capital. That Chicago-based investment manager specialized in sale-leaseback purchases and net-lease real estate.

As such, it gave Blue Owl its third major focus in the form of real estate assets.

Today, Oak Street is one of Blue Owl’s most exciting growth engines with about $71 billion in assets under management (AUM). That’s partially because it’s directly and intensely involved in the AI infrastructure buildout.

For instance, Blue Owl is now a major capital partner behind Meta’s (META) massive Hyperion data center in Richland Parish, Louisiana. When this 5-gigawatt (GW) AI training facility fully opens in 2032, it will be one of the largest in the world.

Other notable projects include a $12 billion Amazon (AMZN) campus in Louisiana, and Stargate data centers in Texas and New Mexico. All told, Blue Owl’s platform involves around 8.9 GW of leased capacity in 199 operational or under-construction facilities across 36 markets.

Better yet for its clients, this all comes giftwrapped with vertically integrated development capabilities. Financing, capital formation, development, construction, long-term operations assistance… Blue Owl can help with all those services.

And each one is becoming more and more valuable thanks to increasing data center opposition. The more people push back against these structures, the more assistance hyperscalers like Meta are going to need.

That’s why I can’t agree with Blue Owl's current valuation. With shares trading at about 11.1x earnings, they’re down by more than 50% from their historical valuation around 24x.

Can anyone say “overreaction” with me?

This market disfavor also puts Blue Owl’s dividend yield at nearly 9.7%, a mouthwatering amount to be sure. Though I will add a warning note here…

Based on current earnings, its payout ratio is just above 100%. So there’s little room for error.

Normally, that kind of positioning would automatically disqualify Blue Owl from Wide Moat Research consideration. But I’m willing to keep looking at it for several reasons beyond its extreme price decline.

For one thing, consensus estimates are calling for approximately 11% earnings growth next year and 15% in 2028. If it can meet those expectations, its dividend coverage should improve significantly.

In addition, Blue Owl has an investment-grade balance sheet. Rated BBB, it maintains a net leverage ratio of just 0.78x. That gives it a lot of financial flexibility, something many of its peers can’t boast.

If this asset manager can deliver as predicted over the next two years, I believe shares could generate around 40% annualized total returns from here.

At least.

Again, I’m not taking the risks I mentioned lightly. This is not one of my broad-ranging recommendations suitable for most investors.

Retirees and other investors on fixed incomes should be especially careful about considering Blue Owl for their portfolios.

However, I also can’t overlook its overblown fall from favor in the public markets. While my main focus is on sleep well at night (SWAN) stocks, I know that some of my readers can handle greater risk under the right circumstances.

They’re even looking for such opportunities.

And if they’re also looking for cheaper AI-related investment alternatives than, say, data center-owner Iron Mountain (IRM) – which I wrote about yesterday – then Blue Owl is one place to look.

I’ve got another place to tell you about on Thursday. So stay tuned!

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

P.S. In a few days, I’ll be launching a new YouTube channel called The Ground Up.

It will cover a wide range of real asset opportunities including public and private real estate investment trusts (REITs), infrastructure plays – including through companies like Blue Owl – utilities, railroads, and other interesting topics ranging from 1031 exchanges to Delaware Statutory Trusts and private equity.

Make sure to sign up for The Wide Moat Show so you can get a front row seat to my official announcement!

We put together another great Wide Moat Show episode for you last week titled “7 Strong Buys”… two of which come with especially attractive price points.

There are always worthwhile bargains to be found in the stock market, no matter what. And we’re proving that with finds like:

Discover all this and more when you click right here.