Many growth stocks were crushed last year as rising rates and other macro headwinds drove investors toward more conservative investments. That's what happened to Bilibili (BILI 1.46%), the Chinese tech company, which shed about 85% of its market value after closing at a record high of $156.37 per share last February.

After that steep plunge, Bilibili now trades at just 2.5 times this year's sales. Here's why this stock might be undervalued -- and why it might bounce back if a new bull market starts. 

A person gets ready to stream a live video on a PC.

Image source: Getty Images.

What does Bilibili do?

Bilibili is often called the "YouTube of China" because it's a popular streaming-video platform for user-created content, anime, and gaming videos. However, it also publishes mobile games, hosts online digital comics, and operates an e-commerce marketplace through a partnership with Alibaba's (BABA 0.57%) Taobao. Its entire ecosystem served 326 million monthly active users and 28.1 million monthly paying users at the end of 2022.

Bilibili also served 195 million "official members" -- who need to pass a 100-question test on anime, comics, and gaming (ACG) content to unlock additional content on its site -- at the end of that year. That represented a 34% increase from the end of 2021 and indicates the company remains a popular niche destination for ACG content among dedicated Gen Z visitors.

How fast is Bilibili growing?

In 2022, Bilibili generated 40% of its revenue from value-added services (VAS), which primarily consist of its virtual gifts and subscriptions on its streaming-video platform. It generated 23% of its revenue from its mobile gaming business and another 23% from ad sales across its entire ecosystem.

The remaining 14% mainly came from its e-commerce business, which sells tie-in products for its ACG content. Here's how those four core businesses fared over the past five years.

Revenue Growth by Segment

2018

2019

2020

2021

2022

Value-added services

232%

180%

134%

80%

26%

Mobile gaming

43%

23%

34%

6%

(1%)

Advertising

191%

76%

126%

145%

12%

E-commerce and other

92%

403%

109%

88%

9%

Total

67%

64%

77%

62%

13%

Data source: Bilibili.

Bilibili's growth decelerated significantly over the past two years for two main reasons. First, tighter playtime restrictions and limitations on new video game approvals in China curbed the growth of its gaming business. Second, zero-COVID lockdowns and other macroeconomic headwinds disrupted its streaming video, e-commerce, and advertising divisions.

For 2023, Bilibili expects its revenue to rise by 10%-19%. Analysts anticipate 14% growth this year, followed by 20% growth to 30.1 billion yuan ($4.4 billion) in 2024. We should take those estimates with a grain of salt, but they imply that Bilibili's growth should stabilize and accelerate again as China's economy experiences a post-COVID recovery.

Will Bilibili ever turn a profit?

Bilibili's top-line growth looks stable, but it's been unprofitable ever since its initial public offering (IPO) in 2018. Its net loss widened from 3.1 billion yuan in 2020 to 6.8 billion yuan in 2021, then widened again to 7.5 billion yuan ($1.1 billion) in 2022.

That's why Bilibili is trading at such a low price-to-sales ratio. No one wants to invest in a company with slowing growth and widening losses as interest rates rise. A potential delisting of U.S.-listed Chinese stocks in the near future is also preventing value-seeking investors from diving in. 

However, analysts expect Bilibili to narrow its net loss to 4.7 billion yuan in 2023 and 2.2 billion in 2024 as it downsizes its lower-margin e-sports and e-commerce businesses. Those are certainly baby steps in the right direction, but it could still take years for the company to break even. But on the bright side, it was still sitting on 19.6 billion yuan ($2.8 billion) in cash, cash equivalents, and short-term investments at the end of 2022.

Why Bilibili will bounce back in a bull market

Bilibili will likely remain out of favor for at least a few more quarters but could quickly command a higher valuation if a new bull market starts and the company continues to narrow its losses. As China reopens and recovers from its zero-COVID lockdowns, Bilibili could crush analysts' conservative expectations as Gen Z users flock back to its streaming videos and games. China's crackdown on its gaming sector also seems to be ending as it approves more games.

Bilibili's stock won't revisit its all-time highs anytime soon. However, I believe its valuation will limit its downside potential and that the company could easily rise by double-digit percentages once investors develop an appetite for higher-growth tech stocks again.