So far in 2020, Bilibili (NASDAQ:BILI) stock has been on a tear as it is up over 20%. The company is likely to have caught investors’ attention since the last quarter of 2019. In October, BILI stock was hovering around $13. Then on Jan. 9, the share price hit an all-time high of $24.47.

The Shanghai-based anime-themed video sharing and mobile gaming platform, which was founded in 2009, made its U.S. public debut in March 2018.

Given that the company is relatively young, today I’d like to discuss the fundamentals of the company, including its growth potential as well as various risks it faces.

BILI Stock’s Q3 Earnings Received Mixed Reception

Bilibili released Q3 earnings on Nov. 18. Revenue came at $260.1 million, a 72% YoY increase. Its results beat revenue and non-GAAP EPS estimates by $14 million and $0.01 respectively.

Currently, the company reports revenue in four segments:

• Mobile games (about 50% of total revenue)
• Live broadcasting and Value-added services (VAS) (about 25% of total revenue)
• Advertising (about 13% of total revenue)
• E-commerce and others (about 12% of total revenue)

Despite the revenue and EPS beat, net loss surged by 66%. In other words, Bilibili has yet to report a profit; in Q3 losses came at $56.8 million. Although the increase in loss would normally be enough to keep many long-term investors at bay, for now, others have been impressed by other growth metrics, especially regarding user numbers.

Average monthly paying users (MPUs2) reached 7.9 million, a 124% YoY. And average monthly paying users for mobile games increased to approximately 1.5 million, compared to 0.9 million for the same period last year.

Management did not break out gross margin for each business segment but instead reported that the consolidated gross margin was 18.9%.

In general, companies with high user growth rates like Bilibili have high operating expenses as they invest significant amounts of cash into the business. Therefore, many investors regard these losses  acceptable as the company is still in an early stage of growing its business. They also believe that management will be able to monetize the content significantly in the coming quarters.

If the bulls are right, then we can expect the company to take in a lot more revenue from anime video subscriptions, online games and merchandise sales in this new decade.

China’s Youth and Mobile Economy

China is the world’s second-largest economy after the U.S., so markets pay attention to any news headlines that may have a China component.

Early January saw the signing of phase one of the trade deal between China and the U.S. As trade relations between the two countries have gradually improved, risk appetite for Chinese stocks has also increased.

Stocks like Bilibili enable U.S. investors to invest in the growth of consumption-led and technologically-advanced Chinese economy. There are several “megatrends,” including the rise of the middle class and mobile user penetration across the country which will directly and potentially positively impact a business like Bilibili.

China’s unemployment rate now stands at an all-time low of 3.6%. In 2000, average monthly earnings were at a record-low $93. But at the end of 2018, the number stood at $993. No wonder consumers are ready to spend more money on discretionary goods and technology.

The country now has more mobile internet users than the entire population of North America or Europe. In 2018, over 750 million people in China accessed the internet through their mobile phone. That is over half of the population. By 2023, the number may well be close to a billion. With the introduction of 5G, we can expect companies like Bilibili to benefit from this enormous growth.

In Q3, Bilibili’s average monthly active users (MAUs) reached 127.9 million and mobile MAUs reached 114.2 million, representing increases of 38% and 43% from the same period in 2018, respectively. And 78% of these users were aged between 18 to 35.

Yet Chinese Stocks Can Be Volatile

At the height of the trade war, many investors were understandably concerned about an economic slowdown globally, and especially in China. Now investors feel that the recent trade deal is helping ease the pressure on the Chinese economy.

However, over the past few days, global equity markets have also been rather volatile as stocks have reacted to global anxiety over the spread of a new SARS-like coronavirus virus from China. Health authorities believe the outbreak is controllable. Yet Wall Street is worried that there might be adverse economic effects, not only in China but also worldwide.

It is too soon to analyze the full impact of the coronavirus on China’s economy, but when there is a geopolitical event, investors tend to react and sell stocks first. They ask questions later.

Therefore, investors who buy into high-growth Chinese companies like Bilibili should always remember that at times their stocks will likely exhibit high volatility with a potential downward bias. Over the past few days, Bilibili, as well as many other China-based stocks, have come down from their recent highs.

But if history is a guide, any adverse effect from these external events to Chinese growth is likely to be short-lived. Although China’s economy may slow down in the near future, its GDP is still expanding at an average annual rate of 6% minimum, i.e., faster than almost any other major economy.

For prudent investors who do due diligence, such uncertainty can also provide opportunities for finding discounted shares before stock markets regain their confidence and footing. Therefore if there is any further weakness in BILI stock in the coming days, long-term investors may regard it as an opportunity to buy into the shares.

The Bottom Line on BILI Stock

With the recent up move in the rearview mirror, what’s next for Bilibili? If you have not participated in the recent increase in the stock price, I believe there might be a second chance in the coming weeks.

In all, it is a classic example of your typical Chinese tech stock – high growth and huge potential, but loss-making.

Given the recent increase in the BILI stock price, I do not regard it as a value proposition at this point.

If you are also an investor who also pays attention to technical charts, its price action urges caution. It’s almost impossible to time a top and a bottom in the markets. But it is likely that there might soon be a leg down, taking the shares toward $20-$21.

Thus, I’d urge investors to carry out their own research prior to investing in BILI stock in the short-term. Nonetheless, the company is well-positioned to grow its business for the long run.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.