Is Bilibili worth investing in?

For many of China’s biggest companies, 2021 is playing out like a disaster film. Back home, Beijing has cracked the whip on several industries, citing data security and antitrust issues. And in the U.S., regulators say they might delist Chinese companies that do not meet new disclosure rules.

In the meantime, prices for many Chinese stocks are plunging. Among the losers is up-and-coming entertainment company Bilibili Inc. (NASDAQ: BILI). The stock now trades at $70 – $80 a share, down over 55% from 52-week highs set in February 2021. 

This share price decline is in sharp contrast to the company’s second quarter 2021 financial performance as it recorded net revenues of RMB4,495.3 million, a 72% increase from the same period in 2020. 

The strong performance was driven by surging growth in value-added services, advertising and e-commerce revenues. These three divisions posted year over year growth of 98%, 201% and 195% respectively. 

‘YouTube’ of China?

Following its initial website launch in June 2009 and official branding as “Bilibili” in January 2010, the company has evolved into a video-sharing website/ community covering a wide array of interests from lifestyle, games, entertainment, anime and tech to many. 

Bilibili is growing rapidly because it is a leading platform for China’s Gen Z users, especially those who are enthusiastic about ACG (anime, comics and games) content. 86% of its users are aged 35 and below, and its popularity with Gen Z users have attracted large investments from Tencent Holdings Ltd (HKG: 0700) and Alibaba Group Holdings Ltd (NYSE: BABA) into the company. 

In the second quarter 2021, average monthly active users (MAUs) rose 38% year over year to 237.1 million. Growth in mobile MAUs was even more impressive, increasing 44% year over year to 220.5 million. 

The company also reported that its average daily active users (DAUs) increased 24% to 62.7 million, as its average monthly paying users (MPUs) grew 62% to 20.9 million. Moreover, user engagement remains sticky, as the average user spent 81 minutes per day on its platform, the most in the second quarter throughout the company’s operating history. 

Bilibili promotes its users to “official” members, granting them access to exclusive content if they pass a 100-question exam on ACG content. Its number of official members rose 35% year over year to 121 million in the second quarter. 

The company has also improved on the monetisation front. Out of 237.1 million MAUs, 8.8% spent money on Bilibili’s platform, compared to 7.5% in the same period last year. In other words, Bilibili’s users are not only more engaged than ever – they are also more willing to spend money on premium services. 

Can Bilibili continue to grow?

Bilibili’s growth story looks far from over. As it continues investing in quality paid and user-generated content, Bilibili will keep attracting new users. And as this user base expands, Bilibili can rollout new products and services – such as live-streaming and e-commerce – to unlock new sources of revenue. 

Despite the bright long-term prospects, the company faces short term regulatory risks which could impact its business model. For instance, Chinese authorities are imposing strict limits on the time kids can spend playing video games. Online games under the age of 18 are now only allowed to play for an hour on Fridays, weekends and holidays. Needless to say, this will hurt Bilibili’s video games business.

What more, the regulatory crackdown is still on-going. No one know which company or sector Beijing will target next – or how these yet-to-be announced regulations or policies will impact tech companies, including Bilibili. 

The bottom line

After the recent sell-off, Bilibili stock is trading at just 11 times sales. While this is a much palatable valuation, it is by no mean cheap. Especially when you consider that iQiyi, Inc. (NASDAQ: IQ) – one of Bilibili’s main rivals – trades at less than 2 times sales. Yes, Bilibili deserves a higher valuation because the company is growing much faster than iQiyi. But are investors willing to pay such a steep premium for Bilibili? 

While Bilibili is not as exposed to the Chinese government’s wrath as its larger tech peers, the regulatory challenges are still too daunting to ignore. Furthermore, the company is unlikely to be profitable in the near term in despite its growth prospects, hence its valuation could remain under pressure for the time being. 

With all this in mind, investors should consider investing in Bilibili only if they are prepared to hold for the long term – and have some stomach for the volatility being generated right now among Chinese stocks. 

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