High User Engagement And International Expansion Will Improve Future Market Position

Key Takeaways

• Bilibili diversifies successfully into high-margin game genres, boosting revenue potential through expanded content and international launches.
  
• Strong advertising growth and user engagement enhance revenue through improved commercialization and targeted ads, supported by a share repurchase program.
  
• Bilibili's reliance on gaming, advertising, and AI poses risks from market dynamics, competition, execution challenges, and shifting user demographics, impacting revenue and profit margins.

Catalysts

Provides online entertainment services for the young generations in the People’s Republic of China.

• Bilibili's successful diversification into the high-margin strategy game genre, with significant growth in game revenues (up 84% year-over-year), highlights potential for increasing revenue streams and supporting long-term earnings through expanded content updates and new games.
  
• The increasing importance of Bilibili's advertising business, with a 28% year-over-year revenue increase and strength in performance-based ads, is likely to further enhance revenue and net margins through better ad infrastructure, AI integration, and industry vertical expansion.
  
• High user engagement, demonstrated by record daily active users and increased average daily time spent on the platform, provides opportunities for revenue growth through enhanced commercialization channels and better-targeted advertising.
  
• Bilibili’s success in international game launches, exemplified by the global release of popular titles, suggests potential for expanded revenue contribution from overseas markets, particularly as they plan to launch more games internationally.
  
• The announced share repurchase program of up to USD 200 million indicates confidence in the company's future cash flows and profitability, while potentially enhancing earnings per share through reduced share count.

Bilibili Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bilibili's revenue will grow by 13.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -10.7% today to 6.1% in 3 years time.
• Analysts expect earnings to reach CN¥2.2 billion (and earnings per share of CN¥5.32) by about December 2027, up from CN¥-2.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥2.5 billion in earnings, and the most bearish expecting CN¥1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.5x on those 2027 earnings, up from -22.3x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Bilibili Future Earnings Per Share Growth

Risks

• Bilibili's profitability is heavily dependent on its high-margin gaming and advertising businesses, which could face unpredictable market dynamics or competitive pressures, impacting revenue and profit margins.
  
• Despite recent macroeconomic policies, there are uncertainties in advertisers' budgets across different sectors, especially in automotive, fashion, and real estate, potentially limiting advertising revenue growth.
  
• The longevity and sustainable operation of key games like San Mou are crucial for long-term success, but maintaining user engagement and retention remains a challenge and directly affects games revenue.
  
• The user growth and engagement metrics are influenced by shifts in demographics and content competition, presenting a risk to Bilibili's ability to attract and retain users, which could negatively affect earnings.
  
• The company's heavy reliance on AI technology and content innovation, while offering competitive advantages, presents execution risk and resource allocation challenges that could affect overall financial performance, including net margins.

Valuation

• The analysts have a consensus price target of CN¥23.3 for Bilibili based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥33.9, and the most bearish reporting a price target of just CN¥11.92.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥37.1 billion, earnings will come to CN¥2.2 billion, and it would be trading on a PE ratio of 5.5x, assuming you use a discount rate of 8.0%.
• Given the current share price of CN¥20.23, the analyst's price target of CN¥23.3 is 13.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.