Tencent enters the "AI cash-burning phase," the market's first reaction is "unhappy," and the outcome depends on "AI progress in the next few quarters."

Tencent enters the "AI cash-burning phase," the market's first reaction is "unhappy," and the outcome depends on "AI progress in the next few quarters."

Tencent has officially entered a new round of strategy driven by artificial intelligence investment, with the company clearly signaling a priority to build long-term AI infrastructure rather than merely pursuing short-term profit growth.

At the latest earnings call, Tencent management announced plans to at least double investment in Hunyuan and new AI products by 2026. To support increasing AI investment, this year's share repurchase scale is expected to be lower than in 2025. This shift from reducing buybacks to increasing AI investment quickly triggered market volatility, with the initial market reaction appearing "unhappy"—Tencent ADR plunged 4% intraday, and its major shareholder Prosus fell 8%.

According to Chase Trading Desk, Goldman Sachs pointed out in its latest report that Tencent is at a "mixed blessings" turning point. On the one hand, AI is empowering its gaming and advertising business; on the other hand, the company is clearly shifting to an investment phase driven by new AI products. As a result, Goldman Sachs lowered Tencent's profit growth forecast for 2026, estimating adjusted net profit growth of 7% year-on-year, down from the previous 10% forecast.

Although short-term profit expectations are under pressure, market focus will shift to the recovery of Tencent's valuation multiples in the future. Goldman Sachs analysis believes that the next response from investors and the market will mainly depend on Tencent's progress in integrating AI into its core business in the coming quarters, as well as the practical effectiveness of Hunyuan 3.0, Yuanbao applications, and the intelligent agent ecosystem.

Profit Expectations Down: Surging AI Investment Drags Short-Term Revenues

Tencent's capital input into AI is increasing substantially, directly squeezing short-term profit margins.

Goldman Sachs analysts Ronald Keung and others stated in the report that due to increased operating expenses from AI-related costs, Tencent's operating profit margin for fiscal year 2026 is expected to narrow by 65 basis points.

Goldman Sachs cut Tencent's net profit forecast for 2026 and 2027 by 1% to 2%, and lowered its 12-month target price from HK$752 to HK$700.

According to Tencent's disclosed data, in the fourth quarter of 2025 alone, its investment in the "Yuanbao" and Hunyuan large models reached 1.6 billion RMB, with annual spending totaling 1.8 billion RMB. This part of strategic investment is itemized as incubation and upfront capital expenditure for new business by the company. Management expects investment in Hunyuan and new AI products will more than double in 2026. As resources tilt toward AI, faster revenue growth compared to profit growth will become the norm in the short-term.

Goldman Sachs expects Tencent's capital expenditures will reach RMB 100 billion and RMB 110 billion in 2026 and 2027 respectively, and computing resources will be prioritized for these core AI products.

Valuation Multiple Recovery: Core Business Resilience and AI Monetization Potential

Despite downward profit expectations, Goldman Sachs still maintains a "Buy" rating on Tencent, believing there is room for its valuation multiple to recover.

Goldman Sachs points out that Tencent's current forward P/E ratio is about 16 times, lower than the beginning of the year at 18 times, and also below international peers like META and Alphabet. The catalyst for valuation recovery lies in Tencent's shift in AI narrative—from a latecomer in foundational models to a beneficiary in the era of AI intelligent agents.

The strong performance of its core business provides a funding buffer for AI investment. In the fourth quarter of 2025, Tencent's total revenue grew 13% year-on-year. Gaming business, driven by AI efficiency, saw a 22% increase, and marketing services revenue, powered by upgraded AI ad models, grew 19% year-on-year.

Goldman Sachs remains optimistic about Tencent's core business:

Gaming business: Revenue is expected to grow 15% over the last year in Q1 2026 and 12% for the full year. This is thanks to the resilience of evergreen games like Honor of Kings and PUBG Mobile, as well as strong performance from Delta Force and Valorant (PC version). Additionally, lower commissions from Apple and Google app stores are expected to boost Tencent's total operating profit by 1.9%.

Marketing services: Revenue is expected to grow 17% in Q1 2026 and 14% for the full year year-on-year. The time spent by Video Account users grew 20% in 2025, and deepening partnerships with e-commerce platforms will continue to drive advertising revenue growth.

FinTech & Business Services (FBS): Revenue is expected to grow 7% in Q1 2026 and 9% for the full year year-on-year. Wealth management income growth slowed, but commercial payment volume continues to rise; business services benefit from improved pricing amid tight memory and CPU supply, as well as healthy growth of international cloud operations.

Valuation Recovery Tracks New Product Timeline Closely

Regarding the market's short-term pessimism, Goldman Sachs believes that the current AI upfront investment is likely to unlock substantial new value in the future, similar to the path of Tencent Cloud which achieved steady profitability after early-stage investment. Compared to global peers like Meta, Alphabet, or Alibaba with valuation multiples generally at 22 to 29 times, Tencent still has obvious room for valuation recovery.

The report emphasizes that this recovery process will closely revolve around Tencent's AI narrative evolution. Investors need to pay attention to whether Tencent's ad revenue can display acceleration similar to Meta, as well as key AI products’ release timelines.

This includes the expected launch of the Hunyuan 3.0 large model next month, Yuanbao AI applications, WeChat AI assistant, and productivity AI intelligent agent tools including SkillHub, OpenClaw, and WorkBuddy, and their actual commercial performance in the next 3 to 6 months.

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