Bilibili (BILI -1.80%), a fast-growing Chinese entertainment company, just had one of its best years ever in 2020. Revenue grew in excess of 70% in the first nine months of the year while stock price more than quadrupled from its low in March 2020.
Despite its strong performance, there are good reasons to believe the company's best days are yet to come.
A record-breaking quarter with growth across the board
Bilibili's offerings have only become more popular amid the COVID-19 pandemic, as evidenced by its record-breaking third-quarter performance in 2020.
Revenue surged to a record 3.2 billion yuan (about $489 million) on the back of solid growth across all segments. Similarly, gross profit surged 117% year over year thanks to revenue growth and improved operating leverage.
Operation wise, average monthly active users (MAUs) increased on a year-over-year basis by 54% to 197 million and average daily active users (DAUs) grew 42% to 53 million -- both new quarterly levels. Notably, MAUs exceeded 200 million in August, a new monthly record.
Equally important, user engagement has been strong, with users spending an average of 81 minutes per day in its ecosystem. Collectively, users viewed an average of 1.3 billion videos per day, up 77% year over year.
All in all, a remarkable quarter with solid performance across the board. What's more, the company has also positioned itself to sustain its growth. More on that in the sections below.
Bilibili is investing heavily in its content
Following its recent successes, the young company has been doubling down on its investments in content to sustain its momentum.
On one end, it's putting significant effort into growing the amount of professional user-generated video (PUGV) available on its platform -which generally doesn't cost much to the company -- by attracting content creators and also helping them succeed. So far, the results of these efforts have been good. Last quarter, 1.7 million content creators uploaded 5.6 million videos per month on the platform (up 51% and 79% year over year respectively). Notably, traffic to its tech and knowledge vertical is growing rapidly. It attracted 100 million users over the last 12 months.
Bilibili is also investing heavily in paid content. For example, it produced anime content that generated 260 million views in three months, acquired a 9.9% stake in Hong Kong-listed Huanxi Media (giving it access to exclusive content), and created its first music variety show (which got 410 million views).
By relentlessly growing its content library to attract more users (who may, in turn, contribute more content), the company is positioning itself to keep its growth flywheel spinning.
Users are spending more money on the platform
In addition to spending more time on Bilibili's platform, users are also increasingly willing to pay money for premium content.
In the latest quarter, 15 million users spent money on the platform, up 89% year over year. Out of these, 12.8 million are premium subscribers, an improvement of 110% compared to last year.
That growth should alleviate some concerns that investors have had regarding Bilibili's monetization strategy. Moreover, the paying user growth trend has been relatively stable over the last few years -- subscribers more than quadrupled from 2.7 millionin September 2018. In other words, it's not a one-off uptick due to the pandemic.
By strategically focusing on the younger generation (these users are more inclined to spend money on content), Bilibili has positioned itself as the go-to platform now and in the future. So long as the company can continue to delight its users with the right content, there's a good chance that it can continue to grow paying subscribers and revenue. Its net earnings remain in the red though as it continues to reinvest and grow the company.
Bilibili is firing on all cylinders lately, and there's good reason to expect it will be able to maintain its growth trajectory for a while as it keeps adding to its active user base and improves its monetization.
Still, investors should not rush into buying its shares, especially after the price runup of the past months. With the stock now trading at a rich valuation of around 19.1 times trailing sales, a pullback would not be surprising. That correction -- if occurs -- would offer investors a better entry point into this growth stock.