Tencent's announcement of a significant increase in artificial intelligence investment has sparked concerns over short-term profitability, but Bank of America Merrill Lynch views this as a necessary step in the company's AI revaluation journey, asserting that patience will yield rewards.

During its recent earnings call, Tencent revealed plans to at least double its investment in its Hunyuan and new AI products by 2026. This strategic pivot, shifting focus from share buybacks to aggressive AI funding, triggered immediate market volatility, causing a dip in Tencent's share price during the trading session. Over the past five days, the company's stock has declined by more than 8%.

However, according to market intelligence, Bank of America Merrill Lynch has reaffirmed its "Buy" rating on Tencent in a newly released research report, emphasizing that "patience is a virtue."

The path for AI revaluation is clear, centering on three key areas: model development, cloud services, and intelligent agents. Bank of America Merrill Lynch indicated that Tencent's roadmap is well-defined. Key milestones within the next six months include the launch of Hunyuan 3.0 and further upgrades to its large language models. Subsequently, over a 6 to 12-month horizon, an acceleration in capital expenditure and cloud revenue growth is expected to validate the effectiveness of its AI strategy. The major highlight is anticipated within 9 to 18 months: the introduction of the Weixin Agent.

The report suggests the next phase of AI competition is evolving from "who has/develops the best model" to "who can design the best AI-driven products." In this transition, the critical factor for AI agents will not solely be the sophistication of the underlying model but rather the breadth of services, depth of content, and effective utilization of user context. Bank of America Merrill Lynch emphasized, "We believe Tencent is particularly well-positioned in this shift."

The surge in AI investment is expected to pressure short-term profits but promises long-term potential. According to company guidance, AI investment on the profit and loss statement is projected to increase from RMB 18 billion in 2025 to over RMB 36 billion in 2026. Bank of America Merrill Lynch notes this figure excludes capital expenditures or external cloud-related spending.

This increase in investment is forecast to lower the non-GAAP operating profit margin by a low-single-digit percentage in 2026, which the bank considers "appears manageable." To account for the heightened AI spending, Bank of America Merrill Lynch has revised down its non-IFRS net profit forecasts for Tencent for 2026 and 2027 by 4% and 3%, respectively.

Capital expenditure is also set to accelerate, with resources prioritized for core AI products. Bank of America expects Tencent's future capital expenditure growth to pick up speed, likely concentrated in the second half of 2026. Forecasts indicate capital expenditure will rise from RMB 79.2 billion in 2025 to RMB 95 billion in 2026, reaching RMB 120 billion by 2027. Despite this increase, Tencent's capital expenditure intensity from 2026 to 2027 is projected to remain significantly below 50% of its operating cash flow.

The report also mentioned that a recent reduction in the iOS revenue share rate in China—with potential for further decreases—should provide some cushion for AI spending, contributing a low-single-digit benefit to the profit margin.

When comparing Tencent to its closest peer, Alibaba, the report observed that Tencent's AI investment is similar in nature to Alibaba's "all other losses" segment, which also has an annualized run rate of around RMB 40 billion. However, Bank of America Merrill Lynch stressed that Tencent's operating profit margin and operating cash flow in 2025 are significantly higher than Alibaba's.