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3 Risks of Bilibili Stock That Investors Should Know About

Like Bilibili Inc (NASDAQ: BILI)? Here are three key risks investors should be aware of. – Risks stocks

Bilibili Inc (NASDAQ: BILI), a Chinese entertainment company, saw its share price skyrocket 248% in the last 12 months thanks to revenue growth and positive market sentiment.

Bilibili’s strong stock price performance might have enticed investors to buy its stock. Still, there are risks that investors should know about the company before investing their hard-earned capital. Here are three of them.

1. Unprofitable business

One of the main reasons investors have been paying close attention to Bilibili is due to its high revenue growth rates, which was up around 50-fold over the last five years to RMB 6.8 billion (US$973.7 million).

Though impressive, such growth came at a cost – its operating loss has expanded by 305% between 2015 and 2019.

Going forward, investors should expect the company to report a loss in the foreseeable future as it continues to invest to grow the business.

Moreover, since the business remains in its early stages of monetisation, future revenue may fall short of its original plan or it may fail to keep up with escalating costs. In other words, the company may never become profitable.

2. Intense competition

Bilibili operates in the highly competitive entertainment industry, with major players like IQIYI, Tencent Video, Douyin, Kuaishou, and more.

Most of these companies tend to focus on a specific segment of the entertainment industry. For example, IQIYI focuses on video streaming while Bilibili itself operates in many segments.

Hence, there’s a risk the company may be a jack of all trades, but master of none. Moreover, other competitors such as Tencent Video or Douyin can leverage their parents’ resources such as users, cash, and technology to outcompete smaller standalone companies like Bilibili.

So far, Bilibili has been quite successful thanks to its strategy of carving out a niche for itself in the ACG (animation, comics, games) segment.

It has recently expanded into other content areas such as live-streaming, e-commerce, and others.

3. Valuation

Bilibili is a classic growth stock; a very high growth rate but no profits. Hence, we cannot value the company using traditional metrics like the price-to-book (PB) or price-to-earnings (PE) ratios.

Here, I will use the price-to-sales (PS) ratio to roughly gauge Bilibili’s current valuation. At US$46 per share, Bilibili has a market capitalisation of around US$16 billion, and its 2019 revenue was around US$1 billion.

This gives the company a trailing PS ratio of 16x. Comparatively, IQIYI Inc (NASDAQ: IQ) has a PS ratio of about 4x.

I think Bilibili’s current valuation is on the high side, even after factoring in its growth prospects.

Foolish takeaway

Overall, I think Bilibili is a good stock that investors should learn more about thanks to its solid growth track record and strong prospects.

Still, investors cannot ignore the various risks with this investment, which include its loss-making business, intense competition, and high valuation. They should, therefore, exercise caution when investing in this stock.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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