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ANALYSIS: Bilibili Focuses on Memberships as It Seeks Revenue Diversification

Donovan Jones 2019-06-09 20:10 PM

Short Take

Bilibili Inc. (Nasdaq: BILI) recently reported financial results for the Q1 2019 period.

The firm has developed an online digital media content site for younger demographics in China.

BILI is producing significant revenue growth and stable gross profit. Management is focusing on membership and other non-advertising revenue streams as it seeks to reach profitability, possibly in 2019.

Company & Customers

Shanghai, China-based Bilibili was founded in 2009 to provide an online source for digital and animated content for young people in China’s domestic market.

Management is headed by Chairman and CEO Rui Chen, who has been with the firm since November 2014 and was previously co-founder of Cheetah Mobile (NYSE: CMCM).

BILI has created a digital content and e-commerce platform aimed at providing anime, comics and games [ACG] along with video, live broadcasting and mobile games to online communities of young consumers.

The site also has a category it calls ‘professional user-generated content,’ or PUGC, to provide content choices for visitors.

Bilibili markets its online services primarily to whom it terms ‘Generation Z’ demographics, which are defined as individuals born from 1990 to 2009 in China.

The firm obtains new users primarily via online search and social media services which generate viral media and word of mouth referrals.

Bilibili says it plans to ‘deepen our partnership with third-party game developers to offer more games tailored to our platform and our users and enhance our capabilities to develop games in-house.’

Market

According to a market research report by PwC on the China Media Outlook, it forecasts an average CAGR of 8.1 percent for the categories of Total TV and Video Revenue and Video Games for the period 2015 - 2020.

While there is some wiggle room for category definition, the overall growth in demand for online media in China is impressive.

The global entertainment media growth rate is forecasted to be a CAGR of 4.4 percent vs. China’s overall CAGR of 8.8 percent or double the global rate.

By adding a focus on enabling PUGC, or Professional User Generated Content, BILI aims to stay at the forefront of providing an environment where those changing tastes can consume relevant content.

Recent Performance

BILI’s topline revenue by quarter has risen in each of the five quarters since its IPO in early 2018:

(Source: Seeking Alpha)

Quarterly gross profit had been uneven but has stabilized at around $28 million in the last three quarters:


(Source: Seeking Alpha)

Earnings per share (diluted) has also stabilized at a negative 9 cents in the two most recent quarters:

(Source: Seeking Alpha)

Analysis of earnings call sentiment by analysts has shown a strong improvement in sentiment in recent quarters:

(Source: Sentieo)

In the past 12 months, BILI’s stock price has dropped 27.2 percent vs. iQIYI’s (IQ) drop of 56 percent, as the chart below indicates:

(Source: Sentieo)

Earnings surprises in the last two quarters have been positive, likely influencing analyst sentiment to the positive:

(Source: Seeking Alpha)

Commentary

While BILI’s stock price has fallen significantly in the past 52-week period, it has performed better than competitor iQIYI Inc.’s (Nasdaq: IQ) dismal return.

The firm’s outlook improved in recent quarters as its partnerships with Tencent Holdings Ltd. (HKEX: 0700) and Alibaba Group Holding Ltd. (NYSE: BABA) have begun to show results to topline revenue growth.

Community engagement continues to improve and management highlighted its 80 percent 12-month retention rate.

However, expenses have also risen significantly, especially in the R&D line item, which management is focusing on to improve its online games, app development, and virtual idol business.

In April, after first quarter close, the firm successfully raised $734 million in net proceeds from a follow-on offering that it plans to use for improving its content offerings.

Going forward, management intends to continue focusing on its membership revenue streams as a diversification from the advertising model. Additionally, investing resources in its live broadcasting capability will also provide the potential for increasing sales of virtual goods.

While BILI hasn’t reached breakeven profitability yet, management is within striking distance of doing so by the end of 2019 if favorable trends continue.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)