Bilibili: Rapid User Growth Fueling Positive Momentum (NASDAQ:BILI)


China-based Bilibili Inc. (BILI) just reported its Q3 earnings highlighted by an impressive 83% year over year revenue growth. The online entertainment company that combines social media, video sharing, mobile gaming, and e-commerce has gained momentum with a growing user base. The stock jumped by nearly 20% on the report and now up over 210% year to date. While Bilibili has yet to turn a profit, the strong growth and trend of improving margins support a positive long-term outlook. We’re bullish on shares and see upside in the year ahead as the company builds on its market position across various segments with a diversifying revenue mix.

(Seeking Alpha)

BILI Q3 Earnings Recap

Bilibili reported Q3 earnings on November 18th with a GAAP EPS loss of -$0.45 which was $0.02 below expectations. On the other hand, quarterly revenue of $475.1 million in the quarter climbed by 82.7% y/y (or 74% in RMB) and was $7 million above expectations. The gross margin reached 23.9%, up 470 basis points from 19.2% in Q3 2019 driven by the top-line momentum. This was the sixth consecutive quarter of an improving gross margin. The story here was strong growth in monthly active users “MAUs” at 197.2 million climbing 54% y/y, while the average daily active users at 53.3 million increased 42% compared to Q3 2019.

(source: Company IR)

Beyond a historical concentration in mobile gaming where revenues at $188 million climbed 37% y/y, the company has diversified in the recent quarters with accelerating growth in other segments. Ecommerce related sales at $61 million climbed 83% y/y while advertising revenues of $82 million were up 126% y/y. Management highlighted the growth in the number of advertisers who have joined the platform as recognition of Bilibili’s strong brand awareness and market position.

(source: Company IR)

Possibly, the most exciting area for the company is its value-added-services “VAS” where revenues reached $144 million and climbed 116% y/y. This segment includes live broadcasting partnerships and sales of the company’s premium membership service which has also seen an increase in the number of new subscribers. The platform for premium membership has reached 12.8 million users, up 110% y/y.

(source: Company IR)

The company reminds investors that video content remains its core business. Here, Bilibili with a platform for professional-user-generated “PUG” videos draws parallels to Alphabet Inc.’s YouTube (GOOGL) (GOOG), which does not operate in China. Bilibili is also expanding into its own produced original content, focusing on Chinese anime with over 40 new titles between 2020 and 2021.

(source: Company IR)

One of the themes that the company is focusing on is a trend towards “video-lization” were more content and information is being consumed through a video format. Management highlights that there are over 880 million internet users in China and the adoption of 5G wireless broadband technology can drive continued growth opportunities. The company has strong momentum from the important ‘gen-z’ demographic. From the conference call:

We are on excellent growth trajectories. With solid execution of our user growth initiative, we continue to improve our brand equity and reach new heights across key user metrics. The industry trend towards video-lization is working strongly in our favor and we provide the most unique community experience for both content creators and the users. Capitalizing on this momentum, we aim to further grow our brand, enrich our content offering and unleash the great potential of our expanding online entertainment ecosystem.

While the company does not offer full-year earnings guidance, management is targeting Q4 revenue between RMB 3.6 billion and RMB 3.7 billion. At the midpoint, if confirmed, the estimate suggests full-year revenue growth of 76% y/y in the local currency. The quarterly revenue guidance also implies a sequential quarter-over-quarter growth of 16.2%. Longer term, the plan is to pursue monetization channels and leverage premium content to drive growth in paying users. From the conference call:

Our monetization capabilities continue to improve as we leverage our growing traffic base of new users across an increasing broader spectrum of demographics. We will also continue to go out to more premium content services to convert more paying users. We believe that over the longer-term with monetization efforts high paying user conversion rate and scale will yield and improved bottom-line. With that in mind, we are currently projecting net revenue for the fourth quarter of 2020 to be between RMB3.6 billion and RMB3.7 billion.

Finally, the company ended the quarter with RMB 14.1 billion in cash and equivalents representing approximately $2.1 billion, against RMB 8.7 billion or ~$1.3 billion in long-term debt. The net-cash position and overall stable balance sheet support a positive fundamental outlook.

Analysis and Forward-Looking Commentary

The attraction of Bilibili is its interconnected ecosystem across video, gaming, and e-commerce which allows for expanded engagement opportunities among users. The company has established a growing community in video content in important niches like lifestyle vlogs, e-sports, gaming, and anime. The ability to monetize through expanding advertising opportunities bodes well for earnings potential.

We are encouraged by the strong user growth as a sign of brand momentum in the highly competitive Chinese social media market. Bilibili competes with larger companies like Tencent Holdings Limited (OTCPK:TCEHY) with its ‘QQ’ platform and Alibaba Group Holdings (BABA) ‘YouKu’ for video sharing. There is also Weibo Corp. (WB) which focuses on microblogging among others. Considering other global social media companies with publicly available information like Facebook, Inc. (FB), Twitter, Inc. (TWTR), and Snap Inc. (SNAP); Bilibili’s DAU growth at 42% y/y and 74% local currency revenue increase this past quarter was the strongest in the group.

While each of these companies has a different business model targeting different segments, the point here is that Bilibili has established itself as an important player in social media that can lead through innovation and compete for market share in China. A key differentiation in Bilibili is its focus on subscriber growth with paying users which is separate from the add supported businesses. The ability of the company to retain these users can support a long-term trend of climbing recurring revenues which is positive for the earnings outlook.

(source: Company IR)

According to consensus estimates, Bilibili is expected to reach $1.75 billion in revenue this year which represents an 81% increase from 2019. For 2021 and 2022, revenue forecast to increase by 44% and 33% each year respectively implies a strong growth outlook. Compared to estimated negative earnings of -$1.31 per share this year, the expectation is for the loss to narrow going forward and approach profitability by the end of 2022 as the company benefits from firming margins and its expanding scale.

(Seeking Alpha)

Overall, we point to the following bullish drivers we believe the market will focus on over the next year while setting aside the near-term earnings outlook.

  • Topline momentum with 2021 revenue expected to climb 44% y/y.
  • DAU/ MAU figures as an indication of brand momentum.
  • Growth in paying users/subscribers to the premium video network.
  • Trends in advertising.
  • Partnerships for live-video content/ e-sports.
  • Launch of new original programming possibly into new categories.
  • Evolution of the gross margin (23.9% in Q3, up from 19.2% in Q3 2019)

Final Thoughts

The risk here is that growth underperforms expectations as the social media market remains competitive with several companies seeking to attract the same user base. Monitoring points for the upcoming quarter include key metrics like the ratio of paying users per total active users along which can indicate the strength of the subscription business. Weaker than expected results could force a reset of long-term earnings expectations and drive shares lower with a renewed bearish sentiment.

This was a breakout quarter for the company which was able to prove a growing diversification of revenues and strong user trends. We rate shares of BILI as a buy with a year-ahead price target of $75 implying approximately 30% upside. Tactically, considering shares are up over 30% in the past month including the post-earnings release surge, we recommend investors consider waiting for a dip and average into a position to improve their cost basis. While the stock is speculative with a market cap of $20 billion, trading at around 12x sales 2020 revenues, we believe the market will continue to reward the operational momentum while the company is well-positioned to exceed market estimates.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BILI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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