Up-and-coming Chinese entertainment platform Bilibili (BILI 1.85%) has a catchy name and an even catchier business model. The company has a diversified revenue stream, riding the growing demand for online games, live streaming, e-commerce, and other paid subscription services. By combining the playbooks of modern entertainment giants like YouTube, NetEase, Twitch, and Netflix, Bilibili is seemingly one of a kind.
At least investors think so, as the stock has gained almost 300% year to date. For existing shareholders and those on the sidelines considering a position, here are two underfollowed aspects of the company you shouldn't miss.
It's doubling down on content
Bilibili began as a platform for users to share animation, comics, and game-related content. It has since expanded to include other formats such as short videos and live streams. Generally, these types of content cost the company little as Bilibili does not have to produce or own them.
But the company is now building its own content library. Its recent acquisition of a 9.9% stake in Hong Kong-listed Huanxi Media marks a formal entry into the business of video production and intellectual property ownership.
As part of a five-year deal with Huanxi -- a studio with a track record of box office hits including 2020's highest-grossing film globally, The Eight Hundred -- Bilibili now has exclusive rights to broadcast existing and upcoming films and series from Huanxi, outside of the latter's video-on-demand platform. Bilibili has also obtained the right of first refusal to all forthcoming films and series from the studio.
The biggest takeaway here is that Bibilibi now has access to exclusive content that it can either sell the rights to or showcase on its platform. Streaming exclusive content on Bilibili could boost engagement and attract new users, creating new income streams such as paid subscriptions. Consider how Netflix has set itself apart with originals like House of Cards and Stranger Things.
Still, production is a risky business as Bilibili needs to make hefty, upfront investments to create original content, and that leads to higher capital requirements for the company. While Huanxi is a well-established studio, there's no guarantee audiences will love every new production.
Another major risk that comes with this strategy is that Bilibili now finds itself in head-to-head competition with China's top video streaming platforms, iQiyi and Tencent Video. Both have larger audiences, more industry experience, and stronger financial positions -- and will do whatever is necessary to defend their turf.
For Bilibili, which is still unprofitable, the expansion into original content will likely strain its balance sheet. It has around 14.1 billion yuan ($2.1 billion) in cash and equivalents, and judging from its recent net loss of 1.1 billion yuan ($162.1 million) in the latest quarter, the company's reserves should sustain its spending over the next few years. Investors will want to keep an eye on the company's cash burn, and any material jump in its net losses could be a red flag.
It has the backing of some serious heavyweights
Another underappreciated fact about Bilibili is that it has the support of Alibaba, Tencent, and Sony. Tencent owns 13.3% of Bilibili, while Alibaba and Sony own 7.2% and 5.0% stakes, respectively.
As rivals, Alibaba and Tencent usually do not co-partner or co-invest in the same businesses, so in China, most companies have to pick either one or the other. But it appears that they have made an exception for Bilibili, thanks to its popularity among Gen Z audiences, which make up 80% of its users.
Bilibili has historically focused on these young viewers, who not only demand high-quality content but are also more than willing to spend on it. According to company data, despite making up just 24% of China's population, Gen Z consumers will account for 62% of the online entertainment market, valued at 679 billion yuan (approximately $104 billion) in 2020.
For Bilibili, having these prominent investors onboard leads to numerous strategic advantages. For example, its collaboration with Alibaba helps the company grow its live-streaming e-commerce business. The partnership with Sony, on the other hand, provides access to the Japanese multinational's high-quality animation and gaming content. Similarly, by partnering with Tencent, the young company gains access to Tencent's content across gaming, music, esports, and more.
Overall, the lineup of solid backers provides Bilibili with valuable support as it grows its user base and content offerings. This is crucial for the company to compete against well-funded, aggressive rivals like ByteDance (which owns TikTok) and Kuaishou.
What all this means for investors
China's entertainment industry has become extremely fragmented as the battle for consumers' attention heats up. To stay in the game, Bilibili is investing heavily in content and striking partnerships with leading players, and it will need to make the right moves to sustain its impressive growth trajectory.
Overall, I think these strategies will improve Bilibili's competitive advantages and subsequently create value for shareholders over the long term.