Tencent has officially entered a new strategic cycle driven by artificial intelligence investments, signaling a clear prioritization of building long-term AI infrastructure over solely pursuing short-term profit growth.

During the latest earnings call, Tencent's management announced plans to at least double investment in its Hunyuan model and new AI products by 2026. To support the increasing AI investments, the company expects its share buyback scale for this year to be lower than that of 2025. This shift from reducing buybacks to increasing AI spending quickly triggered market volatility, with initial reactions appearing negative. Tencent's ADR fell 4% during the trading session, while its major shareholder, Prosus, declined 8%.

According to analysis, Goldman Sachs noted in a recent report that Tencent is at a pivotal point with mixed implications. On one hand, AI is empowering its gaming and advertising businesses; on the other, the company is clearly transitioning into an investment phase driven by new AI products. Consequently, Goldman Sachs lowered its profit growth expectation for Tencent in 2026, forecasting a 7% year-on-year increase in adjusted net profit, down from the previous 10% projection.

Despite near-term profit pressure, market focus is expected to shift to a potential recovery in Tencent's valuation multiples. Goldman Sachs analysts believe that investor and market reactions will largely depend on Tencent's progress in integrating AI into its core businesses over the next few quarters, as well as the practical implementation results of Hunyuan 3.0, Yuanbao applications, and its intelligent agent ecosystem.

Profit Expectations Downgraded: Surging AI Investments Weigh on Short-Term Earnings Tencent's financial commitment to AI is increasing significantly, directly squeezing short-term profit margins.

Analysts including Ronald Keung from Goldman Sachs stated in the report that due to rising operational expenses from AI-related costs, they expect Tencent's operating profit margin for fiscal year 2026 to narrow by 65 basis points.

Goldman Sachs reduced its net profit forecasts for Tencent 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" application and the Hunyuan large model reached 1.6 billion yuan, with cumulative annual spending reaching 1.8 billion yuan. This strategic investment is accounted for separately by the company, viewed as incubation and preliminary capital expenditure for new businesses. Management anticipates that investment in Hunyuan and new AI products will more than double in 2026. As resources tilt towards AI, revenue growth outpacing profit growth is expected to become the norm in the short term.

Goldman Sachs forecasts that Tencent's capital expenditure will reach 100 billion yuan and 110 billion yuan in 2026 and 2027, respectively, with computing resources being prioritized for these core AI products.

Valuation Multiple Recovery: Core Business Resilience and AI Monetization Potential Despite the downward revision in profit expectations, Goldman Sachs maintains a "Buy" rating on Tencent, citing room for valuation multiple recovery.

The report points out that Tencent's current forward price-to-earnings ratio is approximately 16 times, lower than the 18 times seen at the start of the year and also below international peers like Meta and Alphabet. The catalyst for valuation recovery lies in the evolution of Tencent's AI narrative—transitioning from a latecomer in foundational models to a potential beneficiary in the era of agentic AI.

The strong performance of its core businesses provides a financial buffer for AI investments. In the fourth quarter of 2025, Tencent's total revenue increased by 13% year-on-year. Its gaming business grew by 22%, aided by AI-driven efficiencies, while marketing services revenue rose 19% year-on-year, driven by upgraded AI advertising models.

Goldman Sachs remains optimistic about Tencent's core business prospects:

Gaming Business: First-quarter and full-year revenue growth for 2026 are forecast at 15% and 12% year-on-year, respectively. This is supported by the resilience of evergreen titles like "Honor of Kings" and "Peacekeeper Elite," alongside strong performance from "Delta Action" and the PC version of "Valorant." Additionally, reduced commission rates on Apple and Google app stores are expected to increase Tencent's total operating profit by 1.9%.

Marketing Services: First-quarter and full-year revenue growth for 2026 are projected at 17% and 14% year-on-year, respectively. A 20% increase in user time spent on Video Accounts in 2025, coupled with deeper cooperation with e-commerce platforms, is expected to continue driving advertising revenue growth.

FinTech and Business Services (FBS): First-quarter and full-year revenue growth for 2026 are estimated at 7% and 9% year-on-year, respectively. Wealth management revenue growth is slowing, but commercial payment volumes continue to expand; the enterprise services segment benefits from improved pricing due to tight memory and CPU supply, alongside healthy growth in international cloud business.

Valuation Recovery Tied to New Product Timelines Addressing short-term market pessimism, Goldman Sachs suggests that the current front-loaded AI investments are poised to unlock significant new value in the future, similar to the path where Tencent's cloud business eventually achieved steady profitability after initial investment phases. Compared to global peers like Meta, Alphabet, or Alibaba, which generally trade at valuation multiples between 22 and 29 times, Tencent still has clear room for valuation recovery.

The report emphasizes that this recovery process will be closely tied to the evolution of Tencent's AI narrative. Investors need to monitor whether Tencent's advertising revenue can show signs of acceleration similar to Meta's experience, as well as the release schedules of key AI products.

This includes the anticipated launch of the Hunyuan 3.0 large model next month, the Yuanbao AI application, a WeChat AI assistant, and the commercial performance over the next 3 to 6 months of productivity AI agent tools such as SkillHub, OpenClaw, and WorkBuddy.