Bilibili stock was eye candy for investors during the start of the pandemic. The stock surged 592% during the pandemic-induced tech bubble (March 2020-February 2021). But all good things come to an end. Bilibili stock lost (down 85%) its pandemic gains as the tech bubble burst, and it is now trading at its pre-pandemic level. What is causing this downturn? Is this dip a buying opportunity for value seekers? Let’s find out!
Bilibili’s Business Model
Founded in 2009 as a website for user-generated content, Bilibili has come a long way into the content space. The company is like YouTube for China that enjoys high traffic and user engagement from the Gen Z crowd. Its breakthrough came in 2014 when it entered mobile gaming, and today this is its biggest revenue generator. Over the years, the company expanded its revenue streams beyond subscriptions into advertising and e-commerce. (In e-commerce, it sells tie-in products for anime, comics, and gaming (ACG) content.)
Even today, it enjoys strong revenue growth, which is its only plus point. However, this growth is surrounded by hurdles and could plague this growth. Its widening losses are now pricking investors, especially in a weak economy.
Bilibili Stock: The Bull Case
Bilibili was at its peak during the pandemic. The global population got hooked to online content. This drove its revenue up 77% in 2020. However, this growth rate normalized to 62% in 2021, which is still a good growth rate. The company continues to see strong growth in its active users and paying users. This is a big plus for Bilibili, given that it operates in a competitive market.
Bilibili, a stock with an over 60% revenue growth rate, looks cheap trading at a price-to-sales ratio of 4.23x. Why is it trading at that level? Because there are risks involved and also due to some recent actions by the company’s management. Let’s analyze these risks.
Bilibili Stock: The Bear Case
While Bilibili has strong revenue growth prospects, it faces the risk of a regulatory crackdown. China’s government has been extremely strict with its approvals of new games, including a seven-month freeze on new game licences. It also tightened the playtime restrictions for minors. Such a rigid environment makes it difficult to do business. Bilibili is hiring 1,000 new employees only to review the content and ensure it is in sync with the regulations.
To add to the manga, the regulators are targeting tech giant’s stocks for anti-competitive behaviour. Tencent and Alibaba, two of the largest shareholders of Bilibili, have faced fines. This regulatory crackdown forced tech giants to sell off their stake in smaller companies, raising fear among Bilibili’s shareholders. Hence, Bilibili proposed to issue US$1.4 billion convertible debt in the third quarter. Debt financing doesn’t go well with a company making losses.
Bilibili’s fundamental risk is its ballooning losses despite strong revenue growth. Its net loss more than doubled (119%) to US$1.1 billion in fiscal 2021 despite a 62% revenue jump. While reporting losses, the company announced to buy back up to US$500 million of American depositary receipts (ADRs) over the next 24 months. CEO Rui Chen will spend his own money to buy up to $10 million worth of ADRs.
A company makes stock buybacks to reduce dilution. But a growth company that is in losses, spending money on buyback sends a negative signal. It shows the company doesn’t have good investments options to fuel the future growth of the company.
Weighing the Risks and Rewards
Goldman Sachs analyst Piyush Mubayi downgraded Bilibili for reasons like “monetization pace, profitability, and cash flow outlook,” amid a softer Chinese economy. The keyword here is softer economy. The same three issues have always been a part of Bilibili. The stock rewarded investors with 590% growth for taking the risk of losses and a regulatory crackdown.
According to data from S&P Global Market Intelligence, none of the analysts following Bilibili expect the company to become profitable in the foreseeable future. So what changed is US investors’ risk appetite. Rising inflation, sky-high gas prices, weak economic growth, the Russia-Ukraine war, and fear of Fed interest rate hike have taken a toll on Nasdaq and NYSE.
The bears are stronger than the bulls in the case of Bilibili. However, there is the hope of continued revenue growth. Bilibili’s official members have to pass a stringent entrance test of 100 questions on ACG content to gain additional perks. On the one hand, US entertainment platforms are trying to make registration easy. On the other, Bilibili has made it tough. Despite this, its member count surged over 35%, showing a loyal user base.
Should You Buy Bilibili Stock?
Bilibili is a high-risk stock that can give high returns in a conducive growth environment. As a value investor, I suggest staying away from this stock. It might block your funds from tapping better growth opportunities. However, be sure to keep an eye on Bilibili as it could bounce back as the pandemic-induced bubble deflates.
Disclosure: The author holds no position mentioned in this article. Freedom Stocks has a disclosure policy.
