Robert Way
Elevator Pitch
Bilibili Inc. (NASDAQ:BILI) [9626:HK] shares are awarded a Hold rating. Previously, I assessed BILI’s financial performance for the first quarter of the prior year and the company’s management guidance for full-year fiscal 2023 in my earlier June 5, 2023 article.
With this latest update, I outline the key positives and negatives for BILI. Bilibili’s user base is sticky and the growth outlook for its advertising business is good. On the other hand, I am less impressed with the company’s shareholder capital return, and I am worried that BILI might need to push back the timeline for breakeven assuming it gets too aggressive on user growth. Bilibili’s shares are fairly valued based on my analysis, and there is a mix of positives and negatives for the stock. As such, I leave my existing Hold rating for BILI unchanged.
Key Positives
Bilibili’s key positives are the stickiness of its user base and the favorable growth prospects of its advertising business.
BILI published a media release at the start of this year sharing details of its “New Year Gala” event held for the fifth year running on the last day of the previous year. In specific terms, Bilibili highlighted in this press release that “the peak popularity index of the livestream” for this end-2023 event was 344 million which was higher than the same metric for the 2019-2022 versions of this year-end show.
The company’s most recent quarterly user-related metrics were also very impressive. As disclosed in its Q3 2023 earnings release, Bilibili’s Daily Active Users (DAUs) and the amount of time users stay on BILI’s platform on average every day grew by +14% YoY and +19% YoY to 102.8 million and 100 minutes, respectively for the third quarter of last year. It is worth noting that the Q3 2023 average user time spent metric of 100 minutes was a new record high.
Based on the metrics disclosed above, it won’t be a stretch to claim that the stickiness of Bilibili’s user base has grown over time.
Separately, the outlook for BILI’s key advertising business is favorable.
The advertising business contributed 28.2% of Bilibili’s revenue for the third quarter of 2023. It is reasonable to think that BILI’s advertising business represented an even larger share of the company’s latest quarterly earnings, as the company noted that “ad revenue” is a “high-margin business” in its Q3 2023 result briefing.
Advertising was the fastest growing business for BILI in Q3 2023. For the most recent quarter, Bilibili’s advertising and Value-Added Services businesses achieved sales expansion rates of +21% and +17%, respectively. In contrast, the company’s mobile games and IP Derivatives & Others businesses suffered from negative revenue growth for the most recent quarter.
Looking ahead, the positive growth momentum for Bilibili’s advertising business is likely to be sustained with an increase in focus on e-commerce ads. BILI shared at its Q3 earnings call that its revenue generated from e-commerce ads jumped by +90% YoY in the latest quarter. Mainland China sell-side research firm CMB International estimates that e-commerce ads will add RMB1.5 billion worth of advertising revenue to Bilibili’s top line, or close to a quarter of the company’s total advertising top line.
In the next section, I turn my attention to Bilibili’s negative factors.
Key Negatives
The key negatives for BILI are its modest shareholder capital return, and the difficulty striking a balance between DAU (Daily Active User) growth and profitability.
Bilibili’s shareholder capital return is unappealing. The company doesn’t pay a dividend. BILI has only spent a total of $53.6 million (slightly more than 10% of its share repurchase program) buying back its own shares after announcing a 24-month $500 million share buyback plan in March 2022.
In my recent January 11, 2024 write-up for Tencent Music Entertainment (TME), I mentioned that “Alibaba (BABA) and Tencent Holdings (OTCPK:TCEHY) (OTCPK:TCTZF) allocated $9.5 billion and $6.2 billion of excess capital to share repurchases, respectively” last year. It is clear that BILI is less attractive than its fellow Chinese internet peers like Tencent and BABA from the perspective of shareholder return.
Moving on to BILI’s profitability outlook, it is necessary to draw attention to the company’s profitability and DAU expansion goals.
At its Q3 2023 results call, Bilibili emphasized that the company “will continue our path of gross profit improvement and loss narrowing” and “continue to work towards the goal of breakeven” in 2024.
On the flip side, an earlier October 11, 2023 article published on technology news portal Technode cited a report from Chinese media Late Post highlighting that BILI “proposed the goal of doubling its current daily active users.”
It is reasonable to be concerned about the possibility of Bilibili investing a larger-than-expected amount of funds to drive DAU growth, which might come at the expense of a potential delay in the achievement of the profitability milestone or slower margin expansion in the future.
Valuations
The mix of positives and negatives for Bilibili seem to be appropriately reflected in the stock’s valuations, which I deem to be fair.
One rule of thumb is that a stock is justified in trading at an Enterprise Value-to-Revenue ratio that is one-tenth of its EBIT margin i.e. a listed company with an EBIT margin of 10% deserves to trade at 1 times EV/Revenue.
In that respect, BILI’s consensus FY 2027 EBIT margin estimate of 8.7% (source: S&P Capital IQ) warrants an EV/Revenue valuation multiple of 0.87 times. Bilibili currently trades at 0.90 times consensus next twelve months’ EV/Revenue as per S&P Capital IQ valuation data.
Closing Thoughts
Bilibili stock is still rated as a Hold. There are pros and cons associated with a potential investment in BILI, and I think that the stock’s current valuations are reasonable.
