Shares of China’s video, comics, and digital games venue Bilibili (NASDAQ:BILI) are on pace to end this week 14.4% higher than last Friday’s close, as the fear linked to recent regulatory crackdowns abates.
Like a slew of other Chinese technology stocks including Alibaba Group Holding, DiDi Global, and Tencent Holdings (just to name a few), Bilibili shares have been falling for months as China’s State Administration for Market Regulations clamps down on their operations. From February’s peak to August’s low, BILI stock lost 60% of its value.
The 33% rebound from that low to its current price near $86, however, suggests investors believe that sell-off was exaggerated and due for the very reversal they helped create.
And they may well be right, at least as it pertains to Bilibili.
Take the nation’s new rules on video gaming introduced in the meantime as an example. These rules limit the number of daily hours that children in China will be allowed to play video games. Games designed for younger kids aren’t a significant piece of Bilibili’s overall revenue mix, however. Indeed, video games alone only account for around one-fourth of the company’s top line, and most of its users are part of an older Gen Z crowd.
Point being, China’s State Administration for Market Regulations has seemingly had ample time to create new rules that complicate Bilibili’s operations. The fact that none have materialized yet could mean none are coming.
On the surface, such an assumption more or less holds water — China’s regulators may well be nearer the end of their crackdown than the beginning of it, and could be completely done making new rules that adversely impact Bilibili. If that’s the case, the fact that shares are still down 45% from February’s highs despite this week’s big gain means there’s upside ahead.
That’s a huge “if” for investors to gamble on, however.
The advent of new restrictions late last month could also imply that the country’s State Administration for Market Regulations is still not only willing to impose new rules after unveiling several since late last year, but may even be proactively looking for ways to exert greater control of China’s privately held tech enterprises. Content (even including comics and user-generated video) is still subject to new rules, and it’s not inconceivable that Bilibili ends up with collateral damage inflicted by measures not directly aimed at its business models.
That’s not to suggest BILI stock can’t continue its current rally. It is to suggest, however, that such a trade is far more speculative than the average investor may want to take on.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.