On Thursday, Morgan Stanley (NYSE:MS) maintained its Equalweight rating and a $14.00 stock price target on Bilibili (NASDAQ:BILI), following the launch of the company's new mobile game. Bilibili's "San Guo: Mou Ding Tian Xia," a Three Kingdoms-themed strategy game, achieved an impressive third-place ranking in iOS grossing charts on its release day, surpassing the firm's bullish expectations.
The game's success is attributed to its lighter monetization approach, the simplification of complex gameplay, and an innovative hero system. These factors, combined with a scarcity of new titles in the same genre, likely contributed to the strong performance. Still, the longevity of the game's success is uncertain, as this marks Bilibili's first foray into the strategy game category.
Competitors have responded to San Guo's launch by offering free items and promoting less aggressive monetization strategies. Morgan Stanley's base case scenario projects that the game will generate Rmb1 billion in grossing in its first year and contribute an incremental Rmb500 million in revenue in the second half of 2024, starting from the second quarter's baseline.
Despite the game's strong debut, pre-registrations were relatively low, ranging between 2 to 3 million. To achieve significant grossing, a high sales and marketing investment relative to the user base will be necessary, especially considering the lower average revenue per paying user (ARPPU).
The consensus estimate for Bilibili's 2025 earnings per share (P/E) ratio stands at 45 times, which the firm does not find compelling. Even with an optimistic scenario where 2025 game and advertising revenue growth rates are increased to 40% and 25%, respectively, and fixed costs remain stable, the P/E ratio would be around 20 times.
In the second half of 2023, game revenues accounted for 40-50% of Bilibili's gross profit, indicating the importance of the gaming segment to the company's financial performance.
In other recent news, Bilibili Inc ., a significant player in China's internet and media sector, has been the subject of several analyst upgrades and price target increases following its first-quarter results. Barclays (LON:BARC) upgraded Bilibili's rating to Equal Weight from Underweight and set a price target at $14.00, attributing this to the company's significant progress toward breakeven by Q3 2024.
BofA Securities raised its price target to $18 from $17 while maintaining a Buy rating, and Benchmark increased the price target for Bilibili shares to $16.00 from the previous $15.00, also maintaining a Buy rating.
These upgrades and target raises follow the company's Q1 results, which showed improved advertising revenue growth and a positive gross profit margin trend. Bilibili's total revenues increased by 12% year-over-year to RMB5.7 billion, with significant growth in advertising and value-added services. The company's gross profit margin improved to 28.3%, and both adjusted operating loss and adjusted net loss narrowed significantly.
The company also reported a healthy 9% year-over-year growth in daily active users and is optimistic about reaching profitability in 2024. Strategically, Bilibili plans to expand its user base and grow its advertising business, which could lead to further market share gains. A new game launch scheduled for June could provide additional traction and contribute to revenue growth.
InvestingPro Insights
In light of Bilibili's (NASDAQ:BILI) recent venture into the mobile gaming space, it's important to consider the company's financial health and market performance. According to InvestingPro data, Bilibili holds a market capitalization of $6.4 billion USD, with a negative P/E ratio of -9.43, reflecting investor concerns about profitability. Despite these challenges, Bilibili has shown a strong return over the last three months, with a 15.03% price total return, indicating a positive response from the market to recent developments.
InvestingPro Tips suggest that Bilibili holds more cash than debt on its balance sheet, which could provide a cushion for the company as it explores new ventures like "San Guo: Mou Ding Tian Xia." Additionally, Bilibili's position as a prominent player in the Entertainment industry could help leverage its brand and user base for the success of new games. Still, analysts have revised their earnings downwards for the upcoming period, and the consensus does not anticipate the company will be profitable this year.
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