Shares of Bilibili (NASDAQ:BILI) recently rose after the Chinese digital media platform posted its third-quarter earnings. Its revenue surged 72% annually to 1.86 billion yuan ($260 million), marking its strongest growth in five quarters and beating expectations by $9 million.

Its net loss widened from 246.1 million yuan to 405.7 million yuan ($56.8 million), or $0.17 per ADS -- which still beat expectations by a penny. On a non-GAAP basis, which excludes share-based compensation and amortization expenses, its net loss widened from 202.7 million yuan to 343.1 million yuan ($48 million).

Bilibili's banner featuring anime characters.

Image source: Bilibili.

Bilibili's revenue growth looks robust, but it's remained unprofitable since its IPO last March. Let's dig deeper to see if its strengths outweigh its weaknesses.

Accelerating growth in users and revenue

Bilibili's main platform provides anime, comics, and gaming (ACG) content for China's Gen Z users. Its total monthly active users (MAUs) grew 38% annually to 127.9 million. Its year-over-year growth in MAUs and revenue both hit their highest levels in over a year:

Metric

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

MAUs

26%

29%

31%

30%

38%

Revenue

48%

57%

58%

50%

72%

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

Its revenue per MAU also rose 25% to 14.5 yuan ($2.06), while its non-gaming revenue per MAU more than doubled to 7.2 yuan ($1.02). Its average daily active users (DAUs) also grew 40% to 37.6 million.

Bilibili generated over 50% of its revenue from mobile games during the quarter, down from 69% a year earlier. That reduction highlights one of the company's long-term goals: to evolve from a mobile gaming company into a diversified digital media platform.

Another 24% of its revenue came from live video broadcasts and valued-added services (VAS) like virtual gifts and subscriptions, 13% came from digital ads, and 12% came from its e-commerce marketplace. Here's how those four core businesses fared over the past year:

YOY revenue growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Mobile games

24%

15%

27%

16%

25%

Live broadcasting & VAS

292%

276%

205%

175%

167%

Online advertising

179%

302%

60%

75%

80%

E-commerce and other

(20%)*

254%

621%

489%

703%

YOY = Year-over-year. Source: Bilibili quarterly reports. *Due to spin-off of its offline events business.

Evaluating Bilibili's businesses

Bilibili's mobile gaming revenue rose on the popularity of its flagship game, Aniplex's Fate/Grand Order, as well as newer titles. Its live broadcasting and VAS revenue rose as more broadcasters joined the platform and more viewers bought virtual gifts and subscribed to its premium services. It also expanded this platform over the past year with its investments in animation studios and its acquisition of NetEase's (NASDAQ:NTES) digital comics unit.

Promotional art for Fate/Grand Order.

Image source: Aniplex.

Its ad revenue growth accelerated as it ramped up its brand and performance-based ads, which was particularly impressive since its bigger ad rivals -- including Baidu (NASDAQ:BIDU), Tencent(OTC:TCEHY), and Weibo (NASDAQ:WB) -- all posted withering advertising growth in their most recent quarters.

Baidu's ad revenue fell 9% annually last quarter, Tencent's decelerated to 13%, and Weibo's rose just 1%. This indicates that advertisers are being more selective and gravitating toward Gen Z-friendly platforms like Bilibili and ByteDance's TikTok as the economic slowdown crimps their advertising budgets.

Bilibili's e-commerce business, which sells licensed and tie-in products for its ACG content, grew significantly as it tightened the platform's ties to Alibaba's Taobao.

Bilibili expects its total revenue to rise 67%-71% annually in the fourth quarter. However, investors should note that the company often sandbags its guidance: It previously anticipated just 61%-64% sales growth in the third quarter.

What about its widening losses?

Bilibili still lacks a clear path toward profitability, but there are a few glimmers of hope. Its total operating expenses rose 71% annually to 774.4 million ($108.3 million), but that growth rate trailed its revenue growth by a percentage point.

Its spending on sales and marketing, which surged 85% and accounted for nearly half its operating expenses, could also cool off as it passes several intense summer promotional blitzes for its digital platform and games. Bilibili's strong user growth and its rising ad revenue also suggest that it can gradually reduce its own ad spend as its brand grows.

Bilibili's cash and equivalents grew from 5.2 billion yuan at the end of 2018 to 8.4 billion ($1.17 billion) at the end of the quarter, but that notably included a big $734 million boost from a convertible note sale and a secondary ADS offering in April. Bilibili's cash position would have dropped significantly without those offerings, but it can still afford to burn through $50 million per quarter for several more years.

The bottom line

Bilibili remains a promising growth stock in China's crowded tech sector, and it seems fairly cheap at less than four times next year's sales. I'd like to see narrower losses (at least sequentially) before I consider buying any shares, but I think it remains a promising long-term play on China's growing Gen Z market.