Market "votes with its feet" on AI investment? Bank of America: Tencent is very steady; patience is a virtue

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Tencent announced a significant increase in AI investment, triggering market concerns over short-term profitability. However, Bank of America Merrill Lynch believes this is a necessary path for Tencent’s AI revaluation, and patience will be rewarded.

Recently, at its latest earnings call, Tencent announced plans to at least double its investment in Hunyuan and new AI products by 2026. This statement, shifting from reduced buybacks to increased AI investment, quickly caused market volatility. Tencent’s share price fell intraday, and over the past five days, the company’s stock has dropped more than 8% in total.

However, according to Zhui Feng Trading Desk, Bank of America Merrill Lynch, in its latest research report, reiterated its “Buy” rating for Tencent, and emphasized “Patience is a virtue.”

Clear AI Revaluation Path: Model, Cloud, Agent

Bank of America Merrill Lynch pointed out that Tencent’s AI revaluation path is already very clear. In the next six months, the launch of Hunyuan 3.0 (HY3.0) and upgrades to more large language models (LLMs) will be key milestones. Then, over six to twelve months, accelerated growth in capital expenditure and cloud revenue will further validate its AI strategy. And in nine to eighteen months, the launch of Weixin Agent will be a highlight.

Bank of America Merrill Lynch believes that the next stage of AI competition is shifting from “who owns/develops the best models” to “who can design the best AI-driven products.” In this transformation, the key to winning in AI agents is no longer just the complexity of the underlying models, but the breadth of services, the depth of content, and effective utilization of user context. Bank of America Merrill Lynch emphasized: “We believe Tencent is particularly well positioned in this transition.”

AI Investment Surges: Short-Term Profits Under Pressure, Long-Term Prospects Promising

Tencent’s investment in the AI sector is increasing rapidly. According to company guidance, AI investment in the profit statement for 2026 will increase from RMB 18 billion in 2025 to more than RMB 36 billion. Bank of America Merrill Lynch pointed out that this does not include capital expenditure or spending related to external cloud.

This increase in investment is expected to lower the 2026 non-GAAP operating margin to a low single-digit level, but Bank of America Merrill Lynch considers this “appears to be controllable.”

To reflect increased AI investment, Bank of America Merrill Lynch lowered Tencent’s non-IFRS net profit forecasts for 2026 and 2027 by 4% and 3%, respectively.

Capital Expenditure Accelerates: Computing Power Resources Tilt Toward Core AI Products

In terms of capital expenditure, Bank of America expects Tencent’s future growth to accelerate and the increase in 2026 may be concentrated in the second half of the year. It is expected that capital expenditure in 2026 will rise from RMB 79.2 billion in 2025 to RMB 95 billion, and further reach RMB 120 billion in 2027. Nevertheless, Tencent’s capital expenditure intensity in 2026–2027 will remain far below 50% of its operating cash flow.

Additionally, the report mentions that the lower revenue share ratio for iOS in China recently (which may further decrease in the future) should provide some buffer for AI spending, resulting in low single-digit margin gains.

Comparing with its closest peer, Alibaba, the report notes Tencent’s AI investment is very similar to Alibaba’s “all other losses,” with the latter’s annualized run rate also reaching RMB 40 billion. However, Bank of America Merrill Lynch emphasizes that Tencent’s operating margin and operating cash flow in 2025 are significantly higher than Alibaba’s.

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The above exciting content is from Zhui Feng Trading Desk.

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