NetEase (NTES 1.99%) and Bilibili (BILI 4.96%) are well-known tech companies in China. NetEase is one of China's top video game publishers, and it owns the online education platform Youdao (DAO -1.95%) and the streaming music platform NetEase Cloud Music. Bilibili also publishes video games, but it generates most of its revenue from its streaming video platform -- which hosts anime series, video game streams, and other content aimed at Gen Z viewers.
NetEase's stock rallied roughly 40% this year and trades just 20% below its all-time high. Bilibili's stock declined over 40% this year and trades more than 90% below its all-time high. Both stocks hit their record highs during the buying frenzy in meme stocks in February 2021. Let's see why NetEase outperformed Bilibili -- and if it will remain the better buy.
Image source: Getty Images.
NetEase is weathering tough regulatory headwinds
NetEase's revenue rose 19% in 2021 and 10% in 2022, and analysts expect 9% growth (3% growth in USD terms) in 2023. That slowdown was caused by headwinds for its gaming business, which accounted for 77% of its revenue in 2022.
Starting in September 2021, China's media regulators froze their approvals for new games for over a year. They only started to approve NetEase's latest games in late 2022. Those regulators also tightened their daily playtime restrictions for minors. NetEase's gaming revenue still rose 10% in 2022 as it acquired more studios and older PC games like Fantasy Westward Journey Online continued to grow, but that marked a slowdown from its 15% growth in 2021.
Youdao's revenue also declined 6% in 2022 after China's regulators cracked down on for-profit after-school programs over the past year. That crackdown drove Youdao, which was spun off in an IPO in 2019, to develop more smart devices (like translation pens) and other online education tools, which weren't directly exposed to that crackdown.
NetEase Cloud Music's revenue grew 28% in 2022, outpacing the growth of its gaming and Youdao segments, as it gained more paid subscribers. By comparison, its larger rival Tencent Music suffered a 9% revenue decline in 2022.
Analysts expect NetEase's earnings per American depository share (ADS) to rise 28% this year as its sales growth stabilizes, the regulatory headwinds wane, and it reins in its spending. Its stock looks cheap at 15 times forward earnings and pays a forward yield of 1.8%.
Bilibili operates a wobblier business model
Bilibili's revenue surged 77% in 2020 and 62% in 2021, but grew just 13% in 2022. Just like NetEase, Bilibili's mobile gaming business suffered a slowdown as China's regulators cracked down on the once-booming industry. Its mobile gaming revenue, which accounted for 22% of its top line, fell 1% in 2022 as its older games lost their luster.
It offset that slowdown with its 26% growth of its value-added services (VAS) revenue, which mainly came from virtual gifts and subscriptions across its streaming video platform, and its 12% growth in advertising revenue. Its e-commerce and other segment (which was renamed as the "IP derivatives and others" segment in 2023) also grew its revenue by 9% during the year as it signed more sublicensing deals for its esports content.
Analysts expect Bilibili's revenue to rise just 5% (and dip 1% in USD terms) in 2023 as it stays deeply unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures. As Bilibili's growth slows to a crawl, it could lose ground to tough competitors like ByteDance's Douyin (known as TikTok overseas) in the streaming video and advertising market for Gen Z users. Its main streaming video platform also faces intense competition from Tencent Video, iQiyi, and Alibaba's Youku Tudou in the subscription-based video market.
Unlike NetEase, which is still expanding its gaming business in a challenging market, Bilibili is intentionally scaling back its mobile gaming business and expanding its non-gaming businesses. That strategy could backfire if its other businesses don't pick up the slack. Bilibili might seem like a bargain right now at less than 2 times this year's sales, but it could continue to trade at that discount until its revenue growth accelerates again.
The obvious winner: NetEase
NetEase and Bilibili could both remain out of favor as long as tensions keep running high between the U.S. and China and the delisting threats for U.S.-listed Chinese stocks remain unresolved. But for investors who can tune out that near-term noise, NetEase's superior sales growth, diversification, stable profits, and low valuation all make it a better buy than Bilibili.
