AI Spending Snuffs Out Tencent's Profit-Growth Run — Update

By Sherry Qin

Tencent Holdings' double-digit earnings growth streak since 2023 ended in the second quarter amid surging investments in artificial intelligence.

The profit slowdown came as the Shenzhen-based company, China's largest by market capitalization, said it is more than doubling its AI spending this year, targeting both foundational models and AI agents for deep ecosystem integration.

The videogame and social-media company said Wednesday that second-quarter net profit was 56.02 billion yuan, equivalent to US$8.30 billion, up 0.7% from the same period last year, missing market expectations. Its adjusted net profit grew 9%.

Revenue climbed 11% to 204.785 billion yuan, slightly ahead of market expectations.

Tencent's capital expenditure more than doubled from a year earlier to 52.78 billion yuan in the second quarter. Heavy AI-related spending has also dragged Tencent into negative free cash flow.

"We substantially stepped up our procurement of compute, which will enable us to convert usage of our applications and models into revenue going forward," said Pony Ma, Tencent's chairman and chief executive.

The aggressive spending has come to some fruition, with Tencent reporting promising progress on the AI front in recent months. It officially released its Hy3 model in July, boasting improved model performance, greater stability and cost efficiency. The average daily token consumption of the preview version has increased 20-fold since its April launch.

The Weixin operator has also started testing an AI agent among a small number of its 1.44 billion users in its superapp, which can help users automate various tasks, such as ordering food delivery or booking a ride, by tapping into mini programs spanning e-commerce.

Meanwhile, its AI desktop agent, WorkBuddy, which is capable of independently executing workflows, has become China's most widely used office agent.

Analysts say they expect Tencent's AI spending momentum to continue amid its AI agent push and improved domestic AI chip supply, even as revenue from these productivity tools remains immaterial, with monetization still at an early stage.

Investors have cooled on Tencent lately, in part due to its higher AI-related expenses, sending shares down about 20% so far this year. The company's valuation repair path will hinge on the progression of its AI narrative, Goldman Sachs analysts wrote in a recent note.

Still, Tencent's core businesses, including games and marketing services, performed better than market expectations.

Marketing services revenue, which rose 22%, was a major driver of the revenue beat after enhancements to its AI-driven ad recommendation model.

The company's bread-and-butter gaming business remained a steady source of revenue in the second quarter. Domestic games revenue rose 17%, driven by its evergreen games "Delta Force" and "Valorant," while international games revenue fell 0.8%.

Write to Sherry Qin at sherry.qin@wsj.com

(END) Dow Jones Newswires

August 12, 2026 06:30 ET (10:30 GMT)