Bilibili Inc - ADR (BILI -3.67%), a young Chinese online entertainment company, saw its share price surged by 187% since its IPO in 2018 on the back of strong revenue growth. Still, investors may wonder what edge does Bilibili has considering that it operates in an ultra-competitive China entertainment industry with major players like IQIYI Inc (IQ), Tencent, HUYA Inc - ADR (HUYA 0.33%), and others. Is it just another wannabe, or is it a legitimate player in this industry? I think it belongs to the latter. In this article, I will explore two areas to help investors better understand the company -- 1) what it does and 2) why the business model works.
Source: Getty Image
What it does
“We enrich the everyday life of young generations in China.”
That’s the mission that Bilibili shared in its IPO prospectus. It aims to fulfill that by providing a wide range of entertainments and services -- which include online games, videos, live broadcasting, and e-commerce -- to delights its users.
A typical user may join Bilibili’s platform initially for its ACG (animation, comics, games) content, then move on to consume other video content --which include professional user-generated and licensed video content -- across different genres including lifestyles, games, dramas and more. Sometimes, he may join his friends -- met on the platform -- for online games that are only available to Bilibili’s users. Occasionally, he tunes in to watch his favorite host performing on the live-streaming show, while at the same time, shops for the latest anime products on Bilibili’s mall. He usually ends up buying something from the mall, as well as rewarding the host with virtual gifts.
In short, Bilibili’s business model combines the playbook from companies such as Youtube, IQIYI Inc (IQ), HUYA Inc - ADR (HUYA 0.33%), and NetEase Inc (NTES 2.85%).
Why the business model works
At first glance, investors may find Bilibili’s “diversified” business model unnecessarily complex, usually a sign of poor focus and unclear strategic direction. Yet, a deeper look into its business model may reveal many positive attributes about the company.
To start with, Bilibili aims to become a one-stop entertainment platform for its users. Thus, by diversifying its content offerings, it can appeal to a wider range of users, as well as improving the engagement level of its existing members. As more users join Bilibili’s platform and the engagement level grows, content creators -- who are also members of the platform-- will be encouraged to share more quality content. This, in turn, attracts even more new users, spiraling a virtual cycle of continuous growth in user base and content. The result is evident in its operational metrics -- monthly active users (MAUs) has grown from 77 million in the first quarter of 2018 to 172 million in the first quarter of 2020 while average usage time per user per day has increased from 76 minutes in 2017 to 87 minutes lately .
With a growing user base and improving engagement level, Bilibili can now monetize its business across multiple avenues, which include mobile games, value-added services, advertising, and e-commerce. This not only results in a more diversified and stable income source for Bilibili but also opens up new growth opportunities. For example, revenue from value-added services grew 172% year-on-year in the first quarter of 2020, more than doubled the company-wide revenue growth rate of 69% thanks to higher income from its newly launched premium membership program and live-broadcasting.
Another important thing worth mentioning here is Bilibili’s strong emphasis on community building and social engagement. There are many aspects to this, which include providing social and interactive features on its platform to encourage interaction among users -- such as bullet chatting, liking and following, gifting and rewarding, and communication tools-- and mandating a membership exam for users to become “official members” -- users need to pass a multiple-choice membership exam consisting of 100 questions, after which they can access to features available only to official members. These efforts result in a more engaged and loyal member base who 1) consumes, uploads and shares more content 2) spends more money on services and products, and 3) becomes the brand ambassador for the company.
Risk
Despite all the positive factors mentioned above, there are risks that investors should know about the young company.
Firstly, Bilibili is still a loss-making business and will likely remain so in the foreseeable future. In fact, the operating loss has expanded by 305% between 2015 and 2019 owing to the continuous investment (in sales and marketing, content, and research and development) to grow the business. As the business is still in its early stage of monetization, there’s a risk that future revenue may fall short of the original plan, or that future revenue growth cannot keep up with the cost escalation. In other words, the company may never become profitable. Fortunately, the company’s financial metrics have shown improvement over the last few years -- for example, quarterly revenue per monthly active user has increased from RMB 11.3 in the first quarter of 2018 to RMB 13.5 in the first quarter of 2020 and gross profit has improved from negative RMB 173 million in 2015 to positive RMB 1.2 billion in 2019 -- indicating that Bilibili is moving closer towards profitability.
Secondly, Bilibili operates in the highly competitive entertainment industry with major players like IQIYI, Tencent Video, Youku, Huya, and more. These companies tend to focus on a specific segment of the entertainment industry -- for example, IQIYI focuses on video streaming while Huya specializes in live-streaming -- while Bilibili operates in many segments. Hence, there’s a risk the company may be a jack of all trades, master of none, resulting in a weakening competitive position over time. So far, however, Bilibili’s strategy has been relatively successful in attracting and retaining its members, evident by its improving operational metrics (mentioned above).
Stock to watch
Bilibili is a classic growth stock that has a very high growth rate but no profits. Though it’s still early days, the young company has demonstrated solid performance -- revenue has grown at an annualized rate of 168% over the last four years -- thanks to its one-stop entertainment platform strategy. Such performance has not gone unnoticed -- both Tencent and Alibaba Group Holding Ltd (BABA -0.94%) have invested 13.3% and 7.2% , respectively, in Bilibili’s stock, which is a vote of confidence for the young company.
On balance, I think Bilibili is a company worthy of further research, especially for investors who are looking to invest in growth stocks.
