There’s an array of performing Chinese stocks amid the Chinese central authorities’ claimed backing of the economic sphere and the financial markets earlier this month. We searched for a “best-in-class” buy and decided that Bilibili Inc. ADR’s (NASDAQ:BILI) prospects are the best aligned for a prolonged growth trajectory. The company’s one of the most lucrative gaming, fintech, and e-commerce providers across the globe, and we assessed its strengths, weaknesses, and its stock valuation profile to provide our readers with this article. We hope you enjoy it!
Driving Forces
A Fantastic Consumer Base
Let’s start with a bottoms-up vantage point of Bilibili’s consumer base. The company has established a stronghold in the Gen-Z subset (born 1985-2009) with its modern product offerings. We see tremendous value in this for two reasons. The first is that Bilibili has longevity ahead of it without having to worry about a pivot amid an aging consumer base. Secondly, China’s new generation is among the breadwinners of a robust economy that’s grown substantially since the 1980s. This ultimately means that the firm’s offerings are selling among a subset of the population with a proclivity to spend on discretionary goods and services.
Bilibili currently generates 87% of its revenue from China’s Gen-Z strata, a surplus of the 67% market occupancy that the age group holds. It’s reported that China’s Gen-Z spends an excess of 83 minutes on video games versus the rest of the population and had a higher per capita value of as much as 99%. These data points are pretty mindboggling and should provoke a sense of excitement if you’re a Bilibili investor.
To best elaborate on the consumer base that Bilibili occupies would be to look at matters from a macroeconomic/holistic vantage point.
The Chinese economy seems to have pivoted after its slowdown during the middle of last year when its governing Chinese Communist Party adjusted its mandate to be less accommodative of large tech and leverage in the system.
However, matters seem to have adjusted for the better ever since, with the country’s GDP rebounding sharply. We’re also attracted to the area’s low inflation rate and think that it could provide Bilibili’s with sustainable earnings support and, in addition, lure global equity investors who’re currently trapped in roaring inflationary areas.
Robust Earnings
Bilibili continued to provide strong earnings reports during the latter part of 2021, however, it was a case of systemic dominance that caused the stock to retreat. We believe that now could be the time for Bilibili stock to prosper, seeing as geopolitical matters have found calm.
Bilibili’s latest earnings report conveyed a stellar fourth-quarter. The firm beat expectations after posting $914.68 million ($3.6 million beat) in revenue and earnings per share of -$0.84 (40.02 beat).
During its full financial year, the tech enterprise experienced a 37% growth in monthly paying users and a 35% increase in monthly active users. The firm’s segment relative revenues showed astounding growth, with its mobile games segment growing by 6%, value-added services 80%, advertising 145%, and E-commerce and Others 88%.
The company’s still unprofitable, and it should be mentioned that its loss from operations widened by 105% during the past year. However, it also needs to be put into context. Bilibili’s main aim at the moment is to scale its business model, and cost reduction will likely be a later priority. For instance, its most significant increase in costs was Research & Development expenses which rose 88% during the year, and the excess spending will possibly benefit the firm in the future and can thus be considered an ‘investment’ instead of an expense.
Stock Valuation
When analyzing growth stocks, you’d preferably want to use the price to sales and price to cash flow multiples above all other price ratios. The reason is that you’re analyzing a stock that isn’t as much influenced by costs but rather the trajectory of topline earnings and cash flows.
Additionally, Bilibili is a technology company, and the nature of its key assets isn’t tangible. Thus, there’s no use in observing the stock’s price to book multiple.
In Bilibili stock, we have an asset that’s clearly still trading above sales and cash flow but, on the other hand, trading at significant discounts on a normalized average basis. Bilibili’s price-to-sales and price-to-cash-flow ratios are trading at 67.75% and 39.53% discounts, respectively, suggesting that there’s much value in-store.
Multiple | Current | 5y Discount |
Price to Sales | 3.10x | 67.75% |
Price to Cash Flow | 146.21x | 39.53% |
Source: Seeking Alpha
Potential Headwinds
It’s proven by now that the Chinese Communist Party and the White House aren’t on the same page on most matters. It needs to be considered that Bilibili is trading on the NASDAQ as an American Depositary Receipt, which can be delisted by the SEC in the case of geopolitical flareups, and this won’t be something new to our eyes.
Another risk to Bilibili investors is that the firm isn’t yet profitable. Although a large bulk of its expenses have been for R&D purposes, the question still remains whether the market will tolerate an unprofitable company for much longer.
Finally, we think that Bilibili’s Sharpe Ratio has a fair bit to improve to fully justify the risk-return profile of the type of asset we’re comfortable with adding an overweight allocation to.
The Bottom Line
Bilibili stock is an investable asset once more amid a reduction of systemic risk in China. The stock could be a “best-in-class” China buy considering its business model, which successfully targets and delivers to China’s Gen-Z population subset. The stock remains undervalued relative to its past price multiples and remains very lucrative, despite already spiking by approximately 30% during the past week.