Gaming Momentum And Ad Strength Will Drive Digital Entertainment’s Next Phase

Key Takeaways

• Enhanced user engagement and creator monetization are fueling sustained revenue and margin growth, supported by a vibrant Gen Z+ user base and expanding value-added services.
  
• Strengthening proprietary content, rapid AI adoption, and disciplined cost control are driving operational efficiency, higher margins, and improving overall profitability.
  
• Heavy reliance on a shrinking youth audience, escalating costs, regulatory risks, and tough competition may constrain growth, compress margins, and threaten long-term profitability.

Catalysts

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

• Bilibili is benefitting from the accelerating shift among young consumers toward interactive digital entertainment, with user engagement metrics such as DAU/MAU, paying users, and daily time spent all reaching record highs-this stronger engagement is likely to convert into sustained top-line revenue growth as the platform captures a larger share of wallet from Gen Z+ users.
  
• The expansion and monetization of Bilibili's creator ecosystem is creating new revenue streams through value-added services (memberships, fan charging, e-commerce), tapping into the rising demand for user-generated content and the growth of the creator economy; this supports higher ARPU and margin improvement.
  
• The company's strengthening of its proprietary IP ecosystem through the success of in-house animation and gaming, particularly with long-life cycle titles like San Mou (with international expansion planned), is likely to support higher content-driven revenues and reduced content cost pressures, positively impacting gross and operating margins.
  
• Rapid adoption of AI technologies-such as recommendation algorithms, content discovery, and AIGC-generated ad creatives-is improving operational efficiency and advertising effectiveness (as evidenced by a 10% lift in eCPM and 20%+ ad revenue growth), which should drive further margin expansion and positive earnings surprises.
  
• Ongoing improvements in operational efficiency and disciplined cost control, underpinned by economies of scale and AI-driven automation, are resulting in stable or declining operating expenses and a path toward mid-to-high teens operating margins, positioning Bilibili to deliver expanding net margins and growing adjusted net profit.

Bilibili Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Bilibili's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 9.6% in 3 years time.
• Analysts expect earnings to reach CN¥3.8 billion (and earnings per share of CN¥8.89) by about April 2029, up from CN¥1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥5.4 billion in earnings, and the most bearish expecting CN¥2.6 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 30.9x on those 2029 earnings, down from 55.4x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 14.3x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.5%, as per the Simply Wall St company report.

Risks

• As Bilibili's growth remains highly concentrated in China and focused on Gen Z+ audiences, demographic shifts such as a declining youth population or evolving content preferences could shrink its core addressable market over time, constraining user and revenue growth.
  
• There is significant execution risk tied to dependence on blockbuster titles like San Mou and a limited upcoming game pipeline subject to regulatory approvals, which may create volatility and concentration risk in games revenue and delay growth in this segment.
  
• Continued rapid expansion in content costs, including investments in exclusive content and creator monetization tools, alongside only incremental improvements in ARPU, may threaten sustained margin expansion and delay consistent profitability.
  
• Bilibili operates in a highly competitive digital media landscape, facing intensifying competition from diversified domestic giants such as Tencent Video, Kuaishou, and Douyin, which could drive up user acquisition costs, erode market share, and put downward pressure on net margins and long-term earnings.
  
• Persistent regulatory uncertainty in China, including heightened scrutiny of online content, licensing delays for games, and evolving standards for user-generated content, exposes Bilibili to risks of content takedowns, fines, or even platform restrictions, leading to unpredictable impacts on revenue and net profit.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $30.65 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 $37.56, and the most bearish reporting a price target of just $21.02.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CN¥39.5 billion, earnings will come to CN¥3.8 billion, and it would be trading on a PE ratio of 30.9x, assuming you use a discount rate of 9.5%.
• Given the current share price of $23.12, the analyst price target of $30.65 is 24.6% 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.