To The Moon

The rule seems to be working this time, at least seen from the strong performance of A shares last week, when the benchmark Shanghai Composite Index surged to over 3087 points on Friday, reversing, at least partially, sentiment among investors that had been dampened after the Shanghai index slid below 2700 points on Sept 18, the lowest since Feb 6. Last week marked the index's biggest gain in 16 years. The best-performing concepts is Tencent Concept.

Considering the different perceptions of the stock, this time TigerPicks chose $Bilibili Inc.(BILI)$ $BILIBILI-W(09626)$ to have a fundamental highlight to help users understand it better.

$Bilibili Inc.(BILI)$ $BILIBILI-W(09626)$

Bilibili Inc. provides online entertainment services for the young generations in China. It offers a range of digital content, including professional user generated videos, mobile games, and value-added services, such as live broadcasting, occupationally generated videos, audio drama on Maoer, and comics on Bilibili Comic.

The company also provides advertising services; and IP derivatives and other services. In addition, it engages in the business and technology development activities; e-commerce business; and video, comics, and game distribution activities. Bilibili Inc. was founded in 2009 and is headquartered in Shanghai.

I rate Bili’s shares as a buy now. BILI is expected to achieve positive earnings in Q3 2024 and deliver significant revenue growth acceleration for the full year. My decision is to upgrade my rating for Bilibili from a Hold to a Buy, after considering the company's favorable financial prospects.

Top-Line Growth Prospects Are Strong

Bilibili highlighted at its second quarter analyst briefing that its "growth momentum" and "prudent cost and expense management" will help the company to achieve its profitability goals outlined above. I have already touched on BILI's gross margin improvement and operating costs-to-sales ratio decline in this section. In the next section, I touch on the company's growth outlook.

In the preceding section, I drew attention to the turnaround of Bilibili's mobile games business and the robust revenue growth for its advertising business. These positive trends are likely to be sustained in the near future.

A key leading indicator of BILI's future top line is the company's deferred revenue balance. In its FY 2023 20-F filing, Bilibili describes deferred revenue as "unsatisfied performance obligations at the end of each reporting period and consists of cash payment received in advance from game players in mobile games, from customers in advertising service."

The deferred revenue balance for Bilibili increased by a substantial +25% QoQ to RMB3,725 million as of end-Q2, 2024. This bodes well for BILI's top-line performance in Q3 2024 and beyond.

BILI revealed at its recent quarterly earnings call that its new game "San Guo: Mou Ding Tian Xia" (or San Mou) introduced to the market in Q2 "returned to the Top 3 on the iOS game grossing chart" with the "launch of the second game season on Aug 3rd." At the company's Q2 2024 results briefing, Bilibili also disclosed its "internal target of making San Mou" a "five years game." In other words, the company's mobile games business is likely to perform well in Q3 2024 and the mid-term, considering the "second game season" which started in August and the reasonably long game lifecycle of 5 years.

On the other hand, BILI's number of advertisers or advertiser base had expanded by more than +50% YoY for 1H 2024. Looking ahead, Bilibili guided for its advertising business achieving "an above-industry average advertising growth rate" in 2H 2024 supported by further "product infrastructure optimization" as per its Q2 earnings briefing commentary. This suggests that the company's advertising business is well-positioned to deliver a good set of results in the latter half of this year, as it has potential product tweaks to improve this business' future performance.

Bilibili's revenue growth in RMB terms is projected to improve from +3% in the previous year to +18% for the current year, as per S&P Capital IQ data. The expected top-line performance improvement seems realistic, taking into account the increase in deferred revenue balance and the favorable prospects for its key businesses. A faster pace of top-line expansion will also likely boost BILI's future profitability as a result of positive operating leverage effects.

'Buy' on unrealized potential

Goldman Sachs upgraded Bili to "buy" from "neutral." They believe the market is underestimating the magnitude of contribution from the company's new games and its ad monetization potential.

They think the company could drive continued upward consensus revisions for the next 6–12 months on: 1) a better new lifecycle for new game titles; 2) faster than peers ads growth; and 3) a favorable business mix/improving cost discipline.

BILI ADS has a PT of $22.6 from Goldman, implying an upside of 24%. Shares in the U.S. rose 46% so far this year, while the benchmark S&P index rose 20%. BILI is rated "buy" from SA analysts and Wall Street, and "strong buy" from Seeking Alpha Quant.

Key Risks

There are two key risk factors that investors should watch.

One key risk is that BILI's new game San Mou loses favor with gamers in subsequent quarters, which could affect the company's future top-line growth outlook.

The other key risk is that Bilibili doesn't manage its costs well, and this might lead to a larger-than-expected increase in operating expenses and weaker-than-expected profitability.

Conclusion

Bilibili's top line and profitability prospects are good, and the stock's valuations are also appealing. BILI's PEG (Price-to-Earnings Growth) valuation metric is attractive at 0.43 times (26/61).

This is calculated based on its consensus FY 2025-2028 normalized EPS CAGR forecast of +61% and its consensus FY 2025 normalized P/E multiple of 26 times as per S&P Capital IQ data.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 10 Wall Street analysts offering 12 month price targets for Bilibili in the last 3 months. The average price target is $18.01 with a high forecast of $22.60 and a low forecast of $13.00. The average price target represents a -21.42% change from the last price of $22.92.

Resource:

https://seekingalpha.com/article/4717159-bilibili-is-a-buy-on-favorable-top-line-and-profitability-outlook-rating-upgrade

https://seekingalpha.com/news/4153474-goldman-ups-bilibili-rating-to-buy-on-companys-unrealized-potential

What are your thoughts on $Bilibili Inc.(BILI)$ $BILIBILI-W(09626)$ ?