Is Bilibili Stock a Buy Now?

Bilibili (BILI -2.09%) was once a high-growth darling of the Chinese tech sector. The online gaming, digital media, and e-commerce company initially dazzled investors with its robust growth rates when it went public in March 2018, and its shares surged from its IPO price of $11.50 to an all-time high of $157.66 last February. But today, the stock trades below $30 a share.

China's crackdown on its top tech companies, including Bilibili's big backers Alibaba and Tencent, spooked investors. Delisting fears in the U.S. further made Chinese stocks even less appealing.

Bilibili's widening losses and rising debt also made it a tough stock to recommend as interest rates rose. Its fourth-quarter report in early March, which missed analysts' top-line estimates and included softer-than-expected guidance for the first quarter, exacerbated that sell-off.

Image source: Getty Images.

But after that steep decline, Bilibili trades at less than three times this year's sales. That's a low price-to-sales ratio for a company that grew its annual revenues at a whopping compound annual growth rate (CAGR) of 67.9% between 2018 and 2021. Should investors start accumulating some shares of this beaten-down growth stock today?

Understanding Bilibili's business

Bilibili provides anime, comics, and gaming (ACG) content to a Gen Z audience through its digital media, gaming, and e-commerce platforms.

Its streaming video platform was initially geared toward anime content, but it gradually evolved into a diversified platform for documentaries, variety shows, and user-created videos. It also expanded its library of digital comics by acquiring NetEase Comics in late 2018. Its video game division publishes popular online games like Fate/Grand Order.

At the end of 2021, Bilibili hosted 271.7 million monthly active users (MAUs), 72.2 million daily active users (DAUs), and 24.5 million monthly paying users (MPUs) across all its platforms. Its year-over-year user growth rates accelerated significantly in 2020 as people played more video games and streamed more digital media content in the early days of the pandemic.

Data source: Bilibili. FY = Fiscal year. YOY = Year over year.

However, its growth decelerated in 2021 as those tailwinds faded. The government's temporary suspension of new game approvals, which started last July as regulators introduced tighter playtime restrictions for minors, generated additional headwinds for its gaming business.

How fast are Bilibili's businesses growing?

Bilibili generated 36% of its revenue from its value-added services (VAS) segment -- which makes money from subscriptions, in-app purchases, and virtual gifts across its digital media platforms -- in 2021.

It generated 26% of its revenue from Mobile Games, 23% of its revenue from ads, and another 14% came from its E-Commerce and Others segment -- which mainly sells tie-in merchandise for its ACG content. Here's how those four businesses fared over the past three years.

Data source: Bilibili. FY = Fiscal year. YOY = Year over year.

Bilibili's VAS growth slowed down amid the saturation of the live streaming video market and tougher censorship standards for digital media platforms. Bilibili's gaming business wasn't significantly impacted by the new playtime restrictions for minors -- since it generates less than 1% of its revenue from players under the age of 18 -- but the drought in new game releases and tough comparisons against the pandemic have throttled its growth.

On the bright side, Bilibili's advertising growth accelerated as it expanded beyond its core gaming and PC markets and into the skincare, cosmetics, food, beverage, and automotive markets. Its e-commerce business is also still growing at a faster clip than most other online marketplaces in China.

However, analysts expect Bilibili's slowdown to continue with approximately 32% revenue growth in both 2022 and 2023. Tighter antitrust restrictions for Tencent and Alibaba -- which integrate Bilibili's services into their respective ecosystems -- could also force both tech giants to divest their stakes in the company or dilute their existing partnerships.

The losses and dilution are worrisome

Bilibili's top-line growth is robust, but it's still drowning in red ink. Its net loss widened from 565 million yuan in 2019 to 1.3 billion yuan in 2020 and then widened again to a whopping 6.8 billion yuan ($1.1 billion) in 2021. Analysts expect Bilibili's net loss to widen again to 7.0 billion yuan in 2022 before narrowing slightly to 5.1 billion yuan ($800 million) in 2023.

Its debt-to-equity ratio also rose from 1.0 in 2019 to 1.4 in 2021 as its total number of weighted average shares climbed 18%.

Bilibili recently announced a new $500 million buyback plan for the next two years, but those share repurchases could merely be aimed at offsetting the dilution from its stock-based compensation instead of actually reducing its total number of outstanding shares. A big buyback also seems to be an irresponsible move for an unprofitable company with widening losses.

Is Bilibili's stock worth buying?

Bilibili will likely remain a top destination for China's Gen Z users, but its decelerating growth, widening losses, rising leverage, and ongoing dilution make it a dangerous stock to own in this challenging market. Investors shouldn't touch Bilibili until it makes progress in those four areas.