I have a 30/70 rule for stock pricing. Essentially, it means I believe 30% of the stock’s expected return is linked to how the company performs, and 70% is connected to the systemic environment. I’m giving Bilibili (NASDAQ:BILI) a near-perfect grade here, as there’s no doubting its underlying business model is a winner. However, BILI stock has faced significant headwinds amid systemic risks from several sources.
But the tides seem to have turned for Bilibili after Beijing threw support behind the financial markets earlier this week. China’s government issued a statement claiming it fully intends to stabilize the financial markets and support economic growth.
Most Chinese stocks have risen by astronomical amounts during the past week, so I didn’t want to present you with a pick that’s fully priced in. I think BILI stock is set for a multi-year bull run and could set itself apart.
What’s in Store for BILI Stock
If we look at matters from the top-down, China’s one of the few zones that isn’t suffering from fierce inflation. Its real economy has pivoted, with growth of 1.6% between October and December after suffering an abrupt drawdown amid President Xi Jinping’s contractionary economic plea.
Considering the nature of its video-based business model, I don’t think Bilibili’s underlying business is that sensitive to fluctuating real economic growth. But it’s evident BILI stock has been affected by real growth factors.
It’s deeply embedded into investors’ brains that growth stocks will outperform during periods of low inflation. They believe future cash flows will be discounted at low rates, thus allowing the firm to sustain its exponential growth pattern.
Bilibili has shown no signs of a slowdown in growth, and its fourth-quarter results provide evidence of that. Along with a 37% increase in monthly paying users, Bilibili managed to reach $907.1 million in revenue. That’s a 54.1% increase versus the previous year.
To break it down for you by segment, as of its fourth-quarter, Bilibili’s annual revenue from e-commerce rose by 88% and advertising sales were up 145%. Revenue for value-added services rose 80%, and mobile games saw an increase of 6%.
A key strength of Bilibili’s business model is 86% of its revenue is generated from users ages 35 and under. That means it won’t be struggling with an aging consumer base anytime soon, allowing it to avoid expensive restructuring costs.
I see much potential for BILI stock as a capital gains play moving forward, and firmly believe many investors may be underestimating its future growth trajectory.
The Valuation of Bilibili
BILI stock is still running at a loss because it’s focused on market penetration and scale rather than profitability. However, we can still draw valuable inferences from the firm’s sales figures and cash flows versus its historical averages. This paints a clear picture of its trajectory.
The stock’s price-to-sales and price-to-cash-flow ratios are trading at five-year discounts worth approximately 67%, and 40%, respectively. This suggests it holds value in abundance. In addition, BILI has an enterprise value-to-sales ratio of only 2.9x, indicating it’s maximizing its sales potential relative to its operational capacity.
Many will argue a profitless company can’t be undervalued, as there’s no investor residual in store. But this is an archaic way of looking at valuation.
It’s perfectly valid to utilize the price-to-sales and price-to-cash-flow ratios as analysis tools for growth stocks. In fact, some investors even use them to analyze venture capital deals. Therefore, I’m concluding we’re looking at an undervalued stock here.
The Bottom Line on BILI Stock
There’s no doubting Bilibili is a beneficiary of systemic support by the Chinese government. However, the stock has potential in its own right, as it has penetrated the Gen-Z market and scaled its topline earnings at a phenomenal rate. BILI remains a growth stock and is undervalued based on key metrics.