Bilibili Inc.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

Bilibili is a leading online entertainment platform in China, catering to a young and culturally engaged audience through content discovery, video streaming, and a vibrant community.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Bilibili is a prominent online entertainment platform in China that primarily targets a younger generation with content ranging from anime, comics, and games (ACG) to user-generated videos, live broadcasting, and educational content. Its platform also includes a community, making it one of the more popular platforms in China among Gen-Z.

Bilibili generates its revenues primarily through the following streams:

Mobile games: Revenue from distributing and operating mobile games.
Value-added services (VAS): Revenue from providing value added services to its users, including premium memberships, live broadcast tipping, and other virtual items purchases.
Advertising: Revenue from placing advertisements on its platform and app.
E-commerce and others: Revenue from sales of merchandise on its e-commerce platform, as well as sales from live broadcasting and content-related activities.

Industry Trends and Competitive Landscape: The Chinese online entertainment market is fiercely competitive and rapidly evolving. As consumer spending on entertainment increases in China, so has competition from all types of content platforms.

The broader internet space is marked with volatility and fast-changing consumer behavior and preferences. Bilibili competes not just with other video platforms, but also mobile game producers, social networking platforms, and digital entertainment companies. There is no clear leader in this space.

Some are focused on streaming, while others are focused on gaming.
All the companies in the space have very large budgets to continue providing unique high quality content.

There is increasing regulation in many of the areas Bilibili competes, and these have a material effect on its operations.

What Makes Bilibili Different? Bilibili’s unique strength is its strong, engaged community, which is more like a social community that is built around creators and users, where users can connect with other users and creators. The site includes discussion and forums. The company has been able to foster that sense of community into a loyal user base of its platform.

Most of its users are also content creators.
The company has been trying to be one step ahead of changes in the market and create/invest into emerging technology as soon as possible.
The platform is very specialized to Gen-Z and is known as a platform for Chinese anime, comics, and games.

Financials and Performance: Here are a few points with regards to the company’s financials:

In the fourth quarter of 2022, the company’s revenues were RMB 6.1 billion, an increase of 0.7% year over year.
Its average daily active users reached 90.3 million, a 13% increase, while the average monthly paying users reached 24.9 million, a 12% increase compared to the same period of 2021.
The company’s loss from operations was RMB1.8 billion, as compared to a loss of 1.83 billion last year, while net loss was at RMB 1.5 billion for the period.
Cost of revenues for Q4 of 2022 was RMB 4.8 billion, an increase of 6.5% from previous year, mainly due to a rising share of content-related costs.
Sales and marketing expenses increased to RMB 1.6 billion from 1.35 billion last year, mainly due to an increase in promotional spending.
On the balance sheet, the company’s cash position has gone down but is still reasonably healthy for the foreseeable future at 21.6 billion RMB, as of December 31, 2022.
The revenue growth has slowed down in recent years, from explosive growth in the past, to barely any growth this quarter. As the market has grown mature, more competition has been eating into growth numbers.

Moat Assessment: 2.5/5 Based on its strong brand recognition within its core user base of young users and its robust community, Bilibili has an economic moat of 2.5/5. The company is a well-established company in the space and its network effects are an advantage. However, the lack of switching costs and intense competition put a barrier to giving it a higher rating. In the future, the company is looking towards original content as well, which would further strengthen its ability to make users stay longer on the platform and reduce reliance on other companies.

Risks That Can Damage the Moat & Business Resilience:

Government Regulation: Bilibili is exposed to a host of regulations and guidelines that can impact their business. These include regulations from the National Press and Publications Administration, The Cyberspace Administration of China, the Ministry of Culture and Tourism, and more. These governmental organizations have put restrictions on online games, broadcasting, and more, in which the company participates. The risks also extend to data collection and storage. Failure to adhere to these regulations can affect the company’s financial position and operation, and could also cause delisting.
Competition: Competition within the Chinese online entertainment space is exceptionally competitive and is becoming even more competitive with new entrants and changes in existing company strategies. With big players and a market that is ever-changing, Bilibili might find it tough to navigate the situation and might be forced to reduce prices.
Content Piracy & Intellectual Property: The content that Bilibili hosts often falls under various copyright laws, many of which are frequently infringed by other companies, which results in the loss of revenue and control over intellectual assets for the company.
Macroeconomic Conditions: Like other businesses in the industry, Bilibili is subjected to general economic downturns or a financial crisis that can negatively affect consumer spending, hence impacting the business’s performance as a whole.
Content Acquisition Costs: Rising competition for content leads to higher prices for new content. As a result, even if Bilibili can increase its revenues from original content, the cost of content production might negate those higher returns.
Reliance on Mobile Gaming: A large portion of the company’s revenues depend on mobile games. A dip or a change in that business can severely damage its overall operations.

Management’s Thoughts on Challenges & Other Recent News: In the latest earnings call, Bilibili’s management pointed out they continue to be focused on improving operational efficiency, controlling costs, and growing core businesses. They have also stated to invest more into their internal capabilities and resources. The company has also stated that the second quarter should be strong for the company, but no numbers were shared. They have also said that the first quarter will be a weaker quarter than others, due to seasonality and limited new releases during the period. The company recently got a license to create games and is looking forward to growing this line of revenue. They also see huge opportunities in educational and user-generated content.

There is a focus from management to create more high-quality content.
The company is also looking into improving the monetization of existing services.
Management has also expressed interest in investing into their “open-source video model” to get more users and creators on the platform.
The company has expressed concerns about the volatility and unpredictability of the market, and they plan on improving their response to it.

Understandability: 3 / 5 The core operations of Bilibili is relatively easy to grasp as a user-facing platform. However, to understand the intricate nature of all the regulations in China, the company’s revenue streams and the complex relationship of various value creation aspects, it can take a little bit more work. So, for an average investor, we rank the understandability as 3/5.

Balance Sheet Health: 3 / 5 Bilibili has a cash position of approximately 21.6 billion RMB, which is great, however, it also has a high amount of short term debt which sits at 13.8 billion RMB. The company also reports an accumulated deficit of 37.2 billion RMB. Even when the company’s overall performance is good, it still has a lot of areas that require improvements. Hence, the balance sheet health is 3/5.