It’s truly amazing how far Chinese multimedia platform Bilibili (NASDAQ:BILI) has come. But what’s exciting for BILI stock is where the company has the potential to go.
Bear in mind that Bilibili was started in 2009 as a fan site for anime. Its founder, Xu Yi, was a teenager at the time. Bilibili remained a nonprofit for several years before it pivoted toward its current business model.
And what a business model it is. Bilibili’s reach encompasses gaming, video streaming, advertising and e-commerce. Those segments have driven impressive growth in recent years, including a very strong 2020.
There’s not much reason to see that growth ending any time soon. Bilibili has captured a key demographic in China, and the company has the potential to expand across demographics in its home country while also moving beyond China’s borders.
To be sure, BILI stock isn’t cheap. But as I often say, in this market quality growth names shouldn’t be. Bilibili certainly qualifies.
The Gen-Z Focus Is Working
From the very beginning, Bilibili has cultivated a rabid and loyal fan base, largely in the “Generation Z” cohort. That’s a key part of the bull case for BILI stock.
The company first tapped that base to build out its mobile gaming business. In 2017, for instance, gaming revenue of $324 million represented 83% of the company’s total.
The mobile games business continues to grow nicely: 2020 revenue in the segment was $736 million. That’s a 127% increase over three years, an annualized growth rate of over 30%. That includes a 34% jump in 2020, thanks in large part to new games. And Bilibili has leveraged that business into a pair of successful esports franchises as well.
But at the same time that gaming has grown, Bilibili also has become more diversified. Mobile games’ share of total revenue dipped to just 40% last year, because the rest of the business is expanding at an even more impressive clip.
The streaming business generated $589 million in revenue in 2020, up 134% year-over-year. Online advertising sales increased 126%. E-commerce sales totaled $231 million, and too more than doubled.
These are impressive numbers indeed.
The good news is that there’s not much reason to expect this performance to stop. Certainly, growth rates may slow as Bilibili gets bigger. But in all four businesses, the company is much closer to the beginning of its growth cycle than the end.
Indeed, a look at the company’s 2015 revenue, detailed in its registration statement ahead of its 2018 initial public offering, shows how much changed in just five years.
In 2015, streaming generated just 6.2 million RMB in revenue — less than $1 million. Advertising and what was then the “others” segment each contributed only $3 million.
In some respects, Bilibili still is learning how to run those businesses. In the Q4 release, management pointed to improved efficiency in the advertising business as a key growth driver. Given the value of the Bilibili brand, and the importance of Gen Z to advertisers, those improvements will continue.
In streaming, Bilibili not only is adding users but more importantly adding paying users. Monetization in the mobile games business too will get better, as has been the case for so many Western companies.
Again, growth is going to slow somewhat. That’s OK. Revenue increased 77% in 2020. After Q4, Bilibili guided for another 60% to 64% increase in the first quarter.
Simply put, this is one of the best growth stories in the market.
Is BILI Stock Too Expensive?
Now, some investors might agree that Bilibili is a growth stock — yet balk at the valuation assigned to BILI stock. Certainly, the stock isn’t cheap. And a recent pullback of late — BILI is down 29% from last month’s highs — shows that investors need to expect some volatility going forward as well.
But that pullback also brings valuation in, at least somewhat. BILI now trades at 21x 2020 revenue. That’s a high multiple, but far from the highest in the market.
Bilibili isn’t profitable yet, and it probably won’t be in 2022, either. But that’s OK. The company wisely is investing behind the business. It’s attracting users which, if history is any guide, will stick around for the long haul and drive profitability in future years.
As long as the current performance continues, Bilibili can easily grow into the current valuation. Given how many different revenue streams are driving growth, it seems likely that the trend will hold. If that’s the case, this recent pullback will in retrospect look like a massive buying opportunity.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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