Bilibili 'Transformation In Progress,' Morgan Stanley Says In Downgrade

Despite the significant rise in users for China-based video-sharing website, Bilibili Inc. BILI, analysts consider the company’s slow ad business growth and hindered revenue in Monday’s downgrade.

The Analyst

Morgan Stanley Alex Poon downgraded Bilibili from Overweight to Equal-Weight and lowered the price target from $13.50 to $11.

The Thesis

According to Poon, Bilibili’s mobile gaming remains the key driver of profitability and cash flow, amounting to 77 percent of total revenue in the second quarter. While the company retains several games on the docket pending license approval, Poon recognizes increased risk based on company earnings and executions.

Based on company data, iOS grossing fell roughly 60 percent quarter-over-quarter, supplementing the existing 30 percent drop in 2018 overall. Additionally, iOS grossing of key launches fell significantly in comparison to other Japanese competitors in the last 12 months, Poon said.

General content production is no catalyst either, according to Poon. Weibo Corp. WB, which shares interface characteristics and user trends similar to Bilibili, has experienced strong headwinds since 2012.

One of the most prominent difficulties lies in the advertising business, Poon said. “Due to online ad revenue market share consolidation towards the bigger platforms (BAT, Toutiao, Weibo) with ~81% share in 2018 (2017: 70%) and less favorable user demographics (>80% are Generation Z with lower spending power than adults).”

Overall, Poon considers the company in the early stages of transformation, with growth in investments outpacing revenue.

Price Action

Bilibili shares were down 2 percent to $12.18 on Monday.

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