Bilibili's Sales Growth Accelerates as It Locks in More Gen Z Users

Bilibili (BILI 0.36%) recently posted its third earnings report as a public company. During the fourth quarter of 2018 the Chinese tech company's revenue rose 57% annually to 1.16 billion RMB ($168 million), clearing estimates by $13 million.

Its digital platform's monthly active users (MAUs) rose 29% annually to 92.8 million. Within that total, its mobile MAUs increased 37% to 79.5 million. Its average monthly paying users, without double-counting its users of multiple services, nearly quadrupled to 4.4 million. Average monthly paid users for its mobile games rose 36% to 0.9 million.

Check out the latest earnings call transcript for Bilibili.

Image source: Getty Images.

Bilibili's revenue and user growth look solid, but its adjusted net loss widened from 25.3 million RMB a year ago to 152 million RMB ($22 million), or a loss of $0.07 per ADS, which still beat expectations by a nickel. On a GAAP basis, its net loss widened from 51 million RMB to 191 million RMB ($28 million).

Investors don't seem concerned about Bilibili's losses for now, since the stock remains more than 50% above its IPO price. But can Bilibili keep impressing investors as it faces a growing number of competitors in China's Gen Z-oriented market?

The key numbers

Bilibili's platform offers a wide range of ACG (animation, comics, and gaming) content for China's Generation Z internet users. To become an "official" member of the site and gain access to more videos and perks, users must pass a 100-question "entrance exam" regarding anime series, comic books, and games within two hours.

Bilibili's number of official members rose 44% annually to 45 million, or nearly half of its MAU base, during the quarter. The growing number of those hardcore fans, who are more likely to pay for premium services, also outpaced the growth of its total MAUs.

Year-over-year growth. Source: Bilibili quarterly reports.

The expansion of Bilibili's user base, its robust revenue growth, and its strong appeal with Gen Z users attracted major investments from Tencent (TCEHY -0.44%) and Alibaba (BABA -1.14%) over the past year.

Bilibili still generates most of its revenue from mobile games, most notably Fate/Grand Order. It's gradually reducing its dependence on mobile games, but its gaming revenue still accounted for 62% of its top line during the quarter.

17% of its revenue came from its live video broadcasting and VAS (value-added services) business, 14% came from online ads, and the remaining 7% came from its "other" businesses, which include its e-commerce platform for tie-in products and online comics. Here's how those businesses fared over the past three quarters.

Source: Bilibili quarterly reports. *Due to spin-off of its offline events business.

These figures indicate that the growth of Bilibili's core gaming business is slowing down, but it's easily offsetting that deceleration with the growth of its other businesses.

Image source: Getty Images.

Its live broadcasting revenue surged as it added more virtual gifts and premium content, the ad business benefited from more brand ads and the introduction of performance-based ads in the prior year quarter, and its e-commerce business -- which was recently integrated into Alibaba's Taobao marketplace -- saw a spike in product sales. Bilibili's recent acquisition of NetEase's (NTES -0.53%) online comics business should further bolster its "other" revenue.

Bilibili expects its revenue to rise 10%-12% sequentially during the first quarter, which would mark an acceleration from its 7% sequential growth in the fourth quarter. Analysts expect its total revenue to rise 54% this year.

But mind the headwinds

Bilibili's top-line growth is impressive, but its cost of revenue jumped 72% annually during the quarter, its operating expenses more than doubled, and it lacks a clear path toward profitability. Its sales and marketing expenses also surged 181% as it promoted its mobile games and its own original anime content.

On the bright side, Bilibili finished the quarter with 4.1 billion RMB ($601 million) in cash, cash equivalents, and time deposits, which represents a big jump from 745 million RMB a year earlier (prior to its IPO) and 2.9 billion RMB in the third quarter.

That cash cushion gives Bilibili plenty of time to gradually narrow its losses. Wall Street expects Bilibili's non-GAAP net loss to narrow from $0.27 per share in 2018 to $0.13 per share in 2019.

Is Bilibili worth buying?

Bilibili's core businesses are flourishing, it retains a strong position in the lucrative Gen Z market, and its stock isn't that pricey at about five times this year's sales. Alibaba, for example, trades at nearly nine times this year's sales.

Therefore investors who crave a higher risk play on the Chinese tech market with multi-bagger potential should follow Tencent and Alibaba's lead and take a closer look at Bilibili.