Morgan Stanley reports that Tencent's solid core fundamentals are being offset by front-loaded investments in artificial intelligence. The firm expects the company's earnings to remain flat from the second half of this year through 2027, prompting a reduction of its price target by more than 15% to HK$550, while maintaining an overweight rating.

Analyst Gary Yu and his team noted in the report that they have raised their capital expenditure forecasts for Tencent for 2026 and 2027 to 200 billion yuan each year. They have also trimmed their non-International Financial Reporting Standards operating profit estimates for this year and next by 1.8% and 12.3%, respectively.

While the increased investment in AI may strain short-term profitability, Tencent is well-positioned to create long-term value. If necessary, excess artificial intelligence infrastructure capacity can be monetized through Tencent Cloud, providing additional downside protection. Tencent's core business remains one of the strongest in China's internet industry, supported by a durable competitive moat and enhanced AI capabilities across WeChat, gaming, and advertising sectors.