Alibaba and Tencent’s aggressive strategic bet on artificial intelligence has won broad market recognition.

On May 13, Alibaba Group and Tencent Holdings released their latest quarterly earnings reports on the same day. Both companies posted revenue slightly below market consensus expectations, yet their share prices surged sharply in the overnight U.S. market: Alibaba’s U.S.-listed stocks jumped 8.3%, while Tencent’s ADRs rose more than 5%.

The market is pricing in not current-period profits, but the commercialization prospects of AI.

Wu Yongming, CEO of Alibaba, stated during the earnings call that the Annual Recurring Revenue (ARR) from Alibaba’s AI models and application services will surpass RMB 10 billion in June and triple to over RMB 30 billion by year-end. This remark has directly boosted investor sentiment. For Tencent, despite overall revenue missing expectations, the resilience of its advertising and gaming businesses, alongside management’s first-ever quantified disclosure of AI investment scale, has also won market approval. AI businesses at both giants have started to monetize.

Following the earnings release, JPMorgan maintained an Overweight rating on both Alibaba and Tencent. It set a target price of USD 200 for Alibaba’s U.S.-listed shares and HK$690 for Tencent’s Hong Kong-listed stock.

Alibaba: Strong Momentum in Cloud and AI, Commercialization Accelerates

Alibaba’s latest earnings print failed to deliver impressive headline revenue and profit figures.

In the quarter ended March 31, 2026, Alibaba recorded revenue of RMB 243.38 billion, a year-on-year increase of 3%, falling short of the market expectation of RMB 246.5 billion. Excluding the divestment impacts of assets such as RT-Mart and Intime Department Store, revenue grew 11% year on year on a comparable basis. Its Non-GAAP net profit stood at merely RMB 86 million, compared with the market consensus forecast of RMB 14.3 billion. JPMorgan commented that this reading will trigger a material downward revision to market earnings estimates for Fiscal Year 2027.

What caused the profit decline? The core driver lies in heavy investment in AI and instant retail. The adjusted EBITA loss of the “All Other” business segment, which includes Tongyi App and AI infrastructure, widened from RMB 9.8 billion in the previous quarter to RMB 21.2 billion. According to All-Weather Tech, JPMorgan analysts pointed out that Alibaba has reinvested over 90% of its quarterly e-commerce profits into user acquisition for Tongyi AI and AI promotion, with such spending intensity set to continue through Fiscal 2027.

Nevertheless, robust performance in its cloud business has offered solid fundamental support for market optimism.

In the first quarter, Alibaba Cloud generated revenue of RMB 41.626 billion, up 38% year on year. Revenue from external clients accelerated to 40% year on year, marking the fastest growth pace in nine quarters. Revenue from AI-related products reached RMB 8.971 billion, registering triple-digit year-on-year growth for 11 consecutive quarters, with its annualized recurring revenue (ARR) exceeding RMB 35.8 billion. The cloud segment’s adjusted EBITA rose 57% year on year to RMB 3.796 billion, with its profit margin edging up 1.1 percentage points to 9.1%.

Alibaba Seizes Monumental Opportunity: Wu Yongming Targets Tenfold Expansion of Data Center Scale

Wu Yongming noted on the earnings call: “AI is driving the full business upgrade of Alibaba Cloud, shifting the core growth driver from traditional computing and storage toward models, computing power and Agent services.” He also revealed that future capital expenditure will exceed the original planned RMB 380 billion, and the scale of data centers will expand more than tenfold compared with 2022, with no server computing cards left idle.

Wu laid out clearer commercialization targets: the ARR of AI models and application services is expected to top RMB 10 billion in the June quarter and break RMB 30 billion by year-end. He also projected that AI-related product revenue will account for over 50% of cloud revenue in the coming year, becoming the primary engine driving cloud business growth.

Xu Hong, CFO of Alibaba, stated in the earnings announcement: “We are confident about business prospects and will continue to invest in AI and cloud integration to strengthen competitive moats.”

Market rumors suggest Alibaba plans to spin off its chip subsidiary 平头哥 (T-Head) for an independent listing, catering to strong investor demand for domestic semiconductor alternatives. T-Head’s self-developed GPUs have achieved mass production, with over 60% of its computing power serving external commercial clients.

Citi analysts raised Alibaba’s U.S. stock target price after the earnings release, commenting: “While heavy AI investment weighs on near-term profitability, management regards this as a proactive strategic choice to capture massive market opportunities.”

Tencent: First Quantified Disclosure of AI Investment; Ad Revenue Growth Accelerates to 20% as AI Monetization Kicks Off

Tencent posted Q1 revenue of RMB 196.5 billion, up 9% year on year, slightly below the market expectation of RMB 199.4 billion. However, its net profit rose 21% year on year to RMB 58.1 billion, beating consensus forecasts.

A more noteworthy set of comparative data was proactively disclosed by management: the reported Non-IFRS operating profit reached RMB 75.6 billion, up 9% year on year; when excluding the investment impact of new AI products including Yuanbao, Hy, CodeBuddy, WorkBuddy and QClaw, the figure would jump to RMB 84.4 billion, representing a 17% year-on-year increase.

This marks Tencent’s first quantified disclosure of AI capital outlays.

JPMorgan offered a clear interpretation: Through this disclosure, management has transformed mainstream pessimistic narratives about AI’s earnings dilution effect from qualitative discussions into a material, auditable line item on the income statement. In short, the cost of AI investment can now be quantified rather than remaining an ambiguous concern.

The bank also pointed out that Tencent’s underlying business fundamentals are healthier than headline data imply, and its AI investment is well-paced and self-funded. The company recorded free cash flow of RMB 56.7 billion in the quarter, easily covering RMB 37 billion in capital expenditure and RMB 7.9 billion in share buybacks, while net cash balance rose nearly RMB 40 billion quarter on quarter to RMB 146.9 billion.

Advertising emerged as the standout segment this quarter. Marketing services revenue grew 20% year on year to RMB 38.2 billion, accelerating from 17% in the previous quarter. Robert Lea, analyst at Bloomberg Intelligence, commented: “Lower-than-expected operating expenses offset sluggish game sales. AI-targeted ad delivery has driven full-year ad revenue growth to 19.8%, an impressive performance for a company of this scale.”

Citi added that 20% year-on-year growth in marketing services revenue exceeded expectations, while enterprise services revenue also climbed 20% year on year, mainly bolstered by domestic and overseas cloud demand and AI-related service offerings.

On the gaming front, domestic game revenue rose 6% year on year. Though the growth rate appears moderate, management explained it was mainly dragged by the Spring Festival scheduling mismatch, while actual in-game revenue maintained double-digit year-on-year growth. Quarterly revenue of Honor of Kings, Game for Peace and Delta Force all hit record highs. International game revenue increased 13% year on year to RMB 18.8 billion.

In terms of capital expenditure, Tencent’s quarterly capex reached RMB 31.9 billion, up 16% year on year and about 63% quarter on year, mainly allocated to AI infrastructure development. Its end-period net cash balance increased nearly RMB 40 billion quarter on quarter to RMB 146.9 billion. Meanwhile, operating cash flow stood at RMB 101.4 billion, largely offset by RMB 37 billion in AI-related capital payments, RMB 5.9 billion in media content payments and RMB 1.8 billion in lease liability repayments.

In terms of AI product progress, Tencent’s restructured AI team launched the Hunyuan 3 preview version large language model at the end of the quarter. Since April 28, it has ranked among the most used models on OpenRouter by token consumption volume. Management revealed that internal token call volume of Hunyuan 3 surged 10 times versus the previous generation, and the model has been integrated into 131 in-house products. WorkBuddy, its efficiency-focused AI agent, ranks among the top domestic peers in daily active users.

At Tencent’s annual general meeting on May 13, Pony Ma, Chairman and CEO, candidately reviewed the company’s tortuous journey in AI development and used a vivid metaphor to depict its current status: already on the AI boat, yet not fully seated firmly.

He remarked: “We thought we boarded the boat a year ago, only to find it was leaking. Now we have stepped aboard steadily, yet still cannot sit comfortably, and we hope the boat can sail faster.”

Wall Street View: Divergent Evaluations with Different Focuses

JPMorgan maintained clear and logical but differentiated views on the two tech giants.

For Alibaba, the analyst team led by Yao Cheng commented that the latest earnings have consolidated rather than undermined prior judgments: cloud external revenue growth accelerated to 40%, AI revenue hit RMB 8.97 billion, and profit margin rose 110 basis points year on year, all sending positive signals.

Analysts expect market consensus earnings forecasts for Alibaba’s Fiscal 2027 to be revised significantly downward, and had anticipated a negative stock price reaction to the earnings print. Instead, its shares surged 8%, indicating the market now assigns higher valuation weight to AI commercialization prospects than near-term profitability.

For Tencent, analysts turned more optimistic. The research note argued that Tencent’s core business engines — the WeChat ecosystem, advertising and gaming — remain resilient, and AI narrative will exert a greater impact on stock direction than earnings upgrades. AI is still underpriced in Tencent’s current valuation; the stock stands poised for upside potential if the company can demonstrate solid execution and product-market fit throughout 2026.

In terms of Wall Street ratings and price targets, JPMorgan kept an Overweight rating on Alibaba with a USD 200 target price, and maintained Overweight on Tencent with a HK$690 target price. Citi retained a Buy rating on Alibaba and lifted its target price to USD 205, while keeping a Buy rating on Tencent with a HK$783 target price.

Common Pressure: Easy to Spend on AI, Hard to Monetize

Earnings reports of both giants reveal a clear industry reality: China’s largest tech firms are striving to translate massive AI investment into new revenue streams, after pouring tens of billions of dollars into data center construction, R&D and talent recruitment.

Alibaba pledged to invest approximately RMB 380 billion (around USD 56 billion) in AI over the next three years, one of the largest investment plans among Chinese tech companies. Martin Lau, President of Tencent, previously stated that Tencent’s 2026 budget for new AI product investment will at least double from the RMB 18 billion spent in 2025.

Meanwhile, both companies face fierce external competition in their core businesses. Alibaba is locked in a price war with Meituan and JD.com in instant retail, where subsidies and discounts are eroding profit margins. Tencent continues to compete with ByteDance for user time, despite its still robust advertising business performance.

On the large model track, both Alibaba and Tencent face competition from pure-play AI startups such as Moonshot AI and MiniMax. Valuations of these startups have skyrocketed since their listing in January this year, diverting some investor attention away from traditional internet giants.

All-Weather Tech reported that Hunyuan 3 preview version quickly became the top-ranked model on OpenRouter after launch, with internal token usage up 10 times and integration into 131 products. Alibaba plans to spin off its chip unit T-Head for independent listing to capitalize on strong investor appetite for domestic GPU alternatives to NVIDIA. T-Head’s self-developed GPUs have achieved mass production, with over 60% of its computing power serving external commercial clients.

The market consensus is clear: sacrificing short-term profits is equivalent to securing a valuable ticket to the AI era. The ultimate value of this ticket remains to be seen.