Tencent: Integration of DeepSeek Strengthens Ecosystem and Long-Term Growth Potential

Key Morningstar Metrics for Tencent Holdings

• Fair Value Estimate: $90.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Tencent TCEHY shares rose after the firm’s announcement that it would integrate DeepSeek into WeChat’s search function.

Why it matters: The decision to integrate a third-party artificial intelligence model into the company’s flagship product despite heavy investment in its own Hunyuan model signals a more open and user-centric approach to AI. Tencent seems to be prioritizing functionality and user experience over exclusivity.

• While the development won’t immediately boost earnings, it strengthens WeChat’s role in the daily lives of 1.3 billion users, building its intangible asset and positioning it for long-term monetization growth through greater usage.

The bottom line: We maintain our fair value estimate and wide moat rating for Tencent. Despite the recent rally, its shares still trade at a more than 30% discount to our fair value. We believe AI is already contributing to Tencent’s earnings in two key areas.

• AI-powered tools will improve content recommendation accuracy and reduce ad creation costs, boosting advertiser returns and Tencent’s ad revenue—a path successfully tested by Meta Platforms META.
• Tencent Cloud will benefit from rising demand for high-performance GPUs to train and run large language models, as well as increased usage of its storage solutions driven by AI adoption—following a proven path demonstrated by Amazon Web Services.

Long view: WeChat’s integration of DeepSeek marks an important step toward transforming the platform into an AI agent. While it’s too early to predict the leader in China’s AI race, Tencent’s swift move signals progress in the right direction.

• Search engines like Baidu once dominated by directing users to websites, but platforms like Taobao, Ctrip, and Xiaohongshu have emerged as vertical search tools, reducing reliance on general-purpose search.
• In the AI era, the apps where users spend the most time, like WeChat, could evolve into AI agents, directly retrieving information for users without requiring visits to external websites or apps.