Wall Street's take on Tencent's earnings: The core business has stabilized, but the AI investment cycle is lengthening, and profit realization will still take time.

Article by: Chase the Wind Trading Desk

Tencent's Q2 financial report shows that advertising and domestic games continue to support growth and profits, but AI investment has shifted from strategic layout to a phase of heavy capital expenditure. The consensus on Wall Street is that,Tencent's core business has not lost momentum; the issue is that AI costs are already being reflected, while commercial returns still require time to materialize.

After the Hong Kong stock market closed on August 12, Tencent released its financial results for the second quarter of 2026. The company's revenue for the quarter reached RMB 204.785 billion, a year-on-year increase of 11%; Non-IFRS operating profit was RMB 75.64 billion, up 9% year-on-year. Both revenue and profit slightly exceeded market expectations, but profit growth lagged behind revenue growth, reflecting that AI-related investments are eroding some operating leverage.

Following the earnings release, Tencent's shares opened lower on August 13, dropping more than 3%. Market focus has shifted from whether quarterly results beat expectations to rising capital expenditures, negative free cash flow, and when AI products will generate verifiable revenue.

The divergence among four institutions lies not in whether Tencent possesses AI competitiveness, but in whether the commercialization speed of the WeChat ecosystem, the Hunyuan model, productivity tools, and cloud services can cover the continuously rising costs of training, inference, and infrastructure.

Tencent's core business performance in the second quarter was better than previously feared by the market.

Marketing services revenue amounted to RMB 43.565 billion, a year-on-year increase of 21.8%, accelerating from the 20% growth rate in the first quarter. Goldman Sachs, Jefferies, and JPMorgan all view advertising as one of the most important growth engines for this quarter.AI-enhanced recommendations, the automated ad delivery tool AIM+, ad formats with higher eCPM, and an increased ad load rate for Channels collectively drove improvements in advertising monetization efficiency.

Channels remain the primary source of incremental growth for Tencent's advertising business. Goldman Sachs noted that while user time spent on Channels grew more than 20% year-on-year, the ad load rate remains below industry levels, implying that Tencent still has room to increase monetization density without significantly impacting user experience.

Highlights in the gaming segment mainly came from the domestic market. Domestic game revenue in the second quarter reached RMB 47.314 billion, a year-on-year increase of 17.2%, significantly faster than the 6% growth in the first quarter. Titles such as Delta Force, VALORANT, and Roco Kingdom: World contributed incremental growth, while operations and content updates for existing games also supported revenue recovery.

International gaming performance was relatively weak. International gaming revenue for the quarter declined by approximately 1% year-on-year in RMB terms,but grew by 4% on a constant currency basis. Weaker performance from some Supercell titles offset the growth seen in Wuthering Waves and the PC version of VALORANT. Consequently, Goldman Sachs lowered the valuation multiples for international gaming, arguing that overseas operations are unlikely to sustain pricing based on higher growth expectations in the short term.

FinTech and Business Services revenue reached RMB 60.286 billion, up 8.6% year-on-year, showing relative stability. Cloud business growth has entered the low-20% range, but this is not yet sufficient to alter the group's overall profit structure.

Compared to the slight beat on the revenue side, the market is more focused on the rapid rise in Tencent's capital expenditures.

Tencent's capital expenditures in Q2 amounted to approximately RMB 52.8 billion, higher than RMB 31.9 billion in Q1, accounting for about 26% of the quarter's revenue and representing a 176% year-on-year increase. JPMorgan noted that Tencent's free cash flow turned negative by RMB 13.8 billion in the quarter, while net cash dropped from RMB 146.9 billion at the end of Q1 to RMB 58.2 billion. AI investment has shifted from a long-term strategic narrative to a tangible cost impacting cash flow and the balance sheet.

UBS Group estimates indicate that Tencent's Q2 capital expenditures rose to approximately RMB 53 billion, leading to an upward revision of the full-year capex forecast from RMB 170 billion to RMB 250 billion. Goldman Sachs also significantly raised its capex forecasts for Tencent over the next few years, projecting capital expenditures of RMB 210 billion, RMB 245 billion, and RMB 247 billion for 2026, 2027, and 2028, respectively.

While institutions differ on specific figures, the direction is consistent: Tencent's AI investment intensity exceeds prior expectations and may continue to rise in the second half of the year.

In Q2, investment in new AI products amounted to approximately RMB 10.5 billion, up from RMB 8.8 billion in Q1. UBS Group believes that excluding the impact of AI spending, Tencent's adjusted operating profit would have grown by 19% year-on-year, whereas the reported Non-IFRS operating profit growth was only 9%. JPMorgan similarly pointed out that excluding new AI products, Tencent's Non-IFRS operating profit would have reached RMB 86.1 billion, a 19% year-on-year increase.

This implies that Tencent's traditional businesses are still generating profit elasticity, but AI is absorbing these incremental gains. The core issue now is not whether Tencent has the capacity to continue investing, but rather how long the period of margin pressure will last.

Tencent's current AI investment is not primarily aimed at leasing computing power externally, but rather prioritizes serving internal model training, AI-native applications, and the WeChat ecosystem.

Goldman Sachs believes that Tencent is directing more resources toward products such as the Hunyuan model, WorkBuddy, CodeBuddy, Yuanbao, and the WeChat "Xiao Wei" assistant.Such investments differ from directly leasing GPUs to external clients, which typically generate short-term revenue more easily. In contrast, the value realization of internal models and applications depends more on user scale, retention, payment rates, and ecosystem synergies.

The Hunyuan model is the first line of observation. UBS Group pointed out that HY3 was launched in July, with daily token consumption increasing sixfold compared to the preview version; a larger-scale HY4 may be rolled out sooner. The market will focus on its performance in complex workflows, agent capabilities, inference costs, and practical application effectiveness, rather than solely on model rankings.

Productivity tools represent the second line. WorkBuddy and CodeBuddy have become important vehicles for Tencent's AI commercialization. According to UBS Group, Tencent's PC-based productivity AI tools recorded 27.5 million interactions in June, surpassing the 12.8 million interactions of the second-largest peer listed.JPMorgan believes that while user growth, retention, and willingness to pay for tokens for WorkBuddy provide initial positive signals, they are not yet sufficient to constitute group-level revenue proof.

WeChat's "Xiao Wei" is the variable with the greatest long-term potential but also the hardest to quantify.Tencent is testing a WeChat Agent driven by a customized WeLM model, aiming to embed AI capabilities into WeChat's content discovery, service execution, and transaction loop. Goldman Sachs believes that if WeChat gradually evolves into an AI-first ecosystem, agent-driven services and transactions could become new commercial entry points.

However, this concept also implies sustained inference costs. Goldman Sachs estimates that the incremental inference cost for "Xiao Wei" in Q4 2026 could equate to 0% to 5% of Tencent's EBIT, expanding to a range of 0% to 14% of EBIT by 2027. The wide range reflects high uncertainty regarding user penetration, token pricing, and product usage frequency.

Tencent Cloud is the segment closest to revenue realization within AI investments, but its current scale is still insufficient to fully offset capital expenditure pressure.

In the second quarter, Tencent Cloud's revenue growth slowed to the low-20% range, driven by AI demand, international expansion, and increased usage of general cloud services. Goldman Sachs stated that as of August, daily token usage on Tencent Cloud's MaaS platform, TokenHub, reached 25 trillion, a fivefold increase over two months. AI demand is gradually translating into revenue from GPU leasing, MaaS, and productivity tools.

Management also noted that the pricing environment for the cloud business has improved since May, with price hikes and reduced discounts helping to optimize pricing.

However, investment banks generally believe that accelerating cloud revenue does not equate to full returns on AI investments. While AI cloud, model services, and productivity tools can provide some profit support, they are still unlikely to cover large-scale server procurement, depreciation, training, and inference costs in the short term.

UBS Group judges that Tencent's AI business is currently more akin to a "revenue option" rather than a mature business capable of significantly driving group profits. The market has seen the costs but has yet to see AI revenue lines of sufficient scale and auditability.

Goldman Sachs has lowered its net profit forecast for Tencent for 2026 to 2028 by 1% to 4%. Specifically, the 2026 EPS forecast was reduced from RMB 30.07 to RMB 29.73, and the 2027 forecast from RMB 32.55 to RMB 31.19. The bank expects Tencent's EPS growth in the third and fourth quarters of 2026 to be only 4% and 0%, respectively.

UBS Group expects Tencent's revenue growth in the second half of 2026 to be around 7% to 8%, with adjusted operating profit potentially declining by about 1% year-on-year. Revenue is projected to grow by 10% in 2027, but adjusted operating profit is expected to remain roughly flat. In the short term, the squeeze on the income statement from AI investments will continue.

In terms of valuation, four institutions maintain positive ratings, but their target prices reflect caution regarding short-term earnings realization. Goldman Sachs maintains a "Buy" rating, lowering its target price from HKD 700 to HKD 670; UBS Group maintains a Buy rating, lowering its target price from HKD 780 to HKD 770; Jefferies maintains a Buy rating with a target price of HKD 750; JPMorgan maintains an "Overweight" rating with a target price of HKD 690.

JPMorgan's assessment aligns more closely with current market sentiment: Tencent has a more solid earnings floor and has clearly disclosed the scale and boundaries of its AI investments, making it suitable for a 12-month holding period. However, in the absence of clear catalyst dates and auditable AI revenue, the stock price may remain in a phase of "low valuation but difficult to re-rate quickly."

Going forward, the market will closely monitor progress on subsequent Hunyuan models, retention and payment data for WorkBuddy and CodeBuddy, user adoption of WeChat's "Xiaowei," and whether Tencent Cloud can continue to drive growth in AI-related revenue. Tencent has already demonstrated that its core business can support these investments; the next step is to prove that rising AI costs can ultimately translate into a sufficiently clear trajectory for revenue and profits.

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