Alibaba and Tencent's heavy investment in AI is gaining market recognition.
On May 13th, Alibaba and Tencent released their latest quarterly financial reports on the same day. The revenue of both companies was slightly lower than market expectations, but overnight stock prices in the US stock market surged: Alibaba's US stock rose 8.3%, and Tencent Holdings' ADR rose over 5%.
The market is not buying current profits, but the prospects of AI commercialization.
Alibaba CEO Wu Yongming stated during the earnings call that the annualized recurring revenue (ARR) from AI models and application services will exceed 10 billion yuan in June and triple to over 30 billion yuan by the end of the year. This statement directly boosted investor confidence. On the Tencent side, although the overall revenue was slightly lower than expected, the resilience of the advertising and gaming businesses, as well as the management's first quantitative disclosure of AI investment, have also gained market recognition. The AI of both companies has started to monetize.
JPMorgan Chase released a quick review after the financial report, maintaining the "increase in holdings" rating for Alibaba and Tencent. Alibaba's target price for the US stock is $200, and Tencent's target price for the Hong Kong stock is HKD 690.
Alibaba: Cloud and AI are strong, commercialization is accelerating
The performance of Alibaba's financial report in terms of main revenue and profit figures may not be impressive enough.
For the quarter ending March 31, 2026, Alibaba's revenue was 243.38 billion yuan, a year-on-year increase of 3%, lower than the market expectation of 246.5 billion yuan. If excluding the impact of disposed businesses such as Gaoxin Retail and Intime, the same caliber revenue increased by 11% year-on-year. The non GAAP net profit was 86 million yuan, while the market consensus expectation was 14.3 billion yuan. Morgan Stanley stated that this number will drive a "significant adjustment" in the market's profit expectations for the 2027 fiscal year.
Why has the profit declined? The core reason is the concentrated investment in AI and instant retail. The adjusted EBITA loss of the "All Other" business division (covering Qianwen App, AI infrastructure, etc.) has expanded from RMB 9.8 billion in the previous quarter to RMB 21.2 billion. According to 24/7 Technology, JPMorgan analysts pointed out that Alibaba has actually reinvested over 90% of its quarterly profits from Chinese e-commerce into user acquisition and AI promotion, and "this spending pace is expected to continue until the 2027 fiscal year.
But the impressive data from cloud services gives the market another reason.
In the first quarter, Alibaba Cloud's revenue was 41.626 billion yuan, a year-on-year increase of 38%. The growth rate of external customer revenue increased to 40%, the fastest in 9 quarters. The revenue of AI related products reached 8.971 billion yuan, achieving triple digit year-on-year growth for the eleventh consecutive quarter, and the annualized recurring revenue (ARR) exceeded 35.8 billion yuan. The adjusted EBITA of cloud business increased by 57% year-on-year to 3.796 billion yuan, and the profit margin increased by 1.1 percentage points year-on-year to 9.1%.
Alibaba is seizing a 'huge opportunity', Wu Yongming: data center scale will grow tenfold
Wu Yongming stated during the conference call: "AI is driving the full business upgrade of Alibaba Cloud, shifting the growth momentum from traditional computing and storage to model, computing power, and agent services. ”He also revealed that future capital expenditures will exceed the original plan of 380 billion yuan, and the scale of future data centers will achieve "more than tenfold growth" compared to 2022, with "no server card idle".
Wu Yongming has set a clearer commercialization goal: it is expected that the annualized recurring revenue (ARR) of AI models and application services will exceed 10 billion yuan in the June quarter and 30 billion yuan by the end of the year. He also stated that the proportion of AI related product revenue will exceed 50% in the next year, becoming the main engine for cloud revenue growth.
Alibaba CFO Xu Hong stated in the financial statement: "We are confident in our business prospects and will continue to invest in AI+cloud to strengthen our competitive advantage. ”
According to rumors, Alibaba also plans to separately list its chip division, Pingtouge, to accommodate investors' strong interest in domestic chips. Pingtou Brother's self-developed GPU has achieved mass production, with over 60% of its computing power serving external commercial customers.
Citigroup analysts raised Alibaba's US stock target price after the financial report, writing: "Although AI technology investment has dragged down profits, management has stated that this is a proactive strategic choice aimed at seizing huge market opportunities. ”
Tencent: AI investment first quantified disclosure, advertising revenue accelerates to 20%, AI has begun to monetize
Tencent's Q1 revenue was 196.5 billion yuan, a year-on-year increase of 9%, slightly lower than the market expectation of 19.94 billion yuan. But the net profit increased by 21% year-on-year to 58.1 billion yuan, exceeding expectations.
More noteworthy is a set of comparative data voluntarily disclosed by the management: non IFRS operating profit of 75.6 billion yuan, a year-on-year increase of 9%; If the investment impact of new AI products (Yuanbao, Hy, CodeBuddy, WorkBuddy, and QClaw) is excluded, this figure will reach 84.4 billion yuan, a year-on-year increase of 17%.
This is Tencent's first quantitative disclosure of AI investment.
JPMorgan Chase explicitly interprets that through this disclosure, the management has transformed the mainstream pessimistic discourse about the dilution effect of AI from a narrative issue to a substantial auditable income statement item. In other words, the cost of AI can now be quantified, rather than being a vague concern.
The bank also pointed out that Tencent's internal business fundamentals are healthier than the overall data presented, and AI investment is "rhythmic and self funded" - with a free cash flow of 56.7 billion yuan this quarter, it can easily cover 37 billion yuan of capital expenditures and 7.9 billion yuan of repurchases, and the total net cash increased to 146.9 billion yuan month on month.
The advertising business is the most eye-catching sector of this season. The marketing service revenue increased by 20% year-on-year to 38.2 billion yuan, further accelerating from the previous quarter's 17% growth rate. Bloomberg think tank analyst Robert Lea wrote, "Lower than expected operating expenses offset weak game sales. AI targeted advertising drove a 19.8% increase in annual advertising revenue, which is quite impressive for a company of this size. ”
Citigroup stated that the company's marketing service revenue increased by 20%, exceeding expectations, while enterprise service revenue increased by 20% year-on-year, mainly driven by domestic and international cloud demand and AI related services.
In terms of gaming, domestic gaming revenue increased by 6% year-on-year, with a seemingly moderate growth rate. However, the management explained that it was mainly affected by the misalignment of the Spring Festival schedule, and the actual year-on-year growth rate of revenue remained in double digits. Honor of Kings, Peacekeeper Elite, and Delta Action all set new records in quarterly revenue. International gaming revenue increased by 13% year-on-year to 18.8 billion yuan.
In terms of capital expenditure, Tencent's capital expenditure for this quarter was 31.9 billion yuan, a year-on-year increase of 16% and a month on month increase of about 63%, mainly used for AI infrastructure construction. The net cash at the end of the period increased by nearly 40 billion yuan to 146.9 billion yuan compared to the previous period. During the same period, the free cash flow was 56.7 billion yuan, and the net cash from operating activities was 101.4 billion yuan, mainly offset by AI related capital expenditure payments of 37 billion yuan, media content payments of 5.9 billion yuan, and lease liability payments of 1.8 billion yuan.
In terms of AI product development, Tencent's restructured AI team released a preview version of the Big Language Model for Hybrid 3 at the end of the season, which has become one of the most widely used models on the OpenRouter platform based on token consumption since April 28th. The management stated that the internal token call volume of Hybrid 3 has increased by 10 times compared to the previous generation, and 131 products have been integrated. The efficiency of AI intelligent agent WorkBuddy ranks among the top in terms of daily active users among similar services in China.
On May 13th, at Tencent's shareholder meeting, Chairman and CEO Ma Huateng candidly stated the company's tortuous journey in the field of artificial intelligence and humorously outlined its current situation: it has boarded the ship, but has not yet settled down.
He said, "A year ago, we thought we were on a boat, but later we found that the boat was leaking water. Now that we feel like we're standing on it, we can't sit down. We still hope the boat can speed up a bit
How does Wall Street view it: polarization, each with its own focus
JPMorgan's evaluation of the two companies is logically clear but with different focuses.
For Alibaba, analyst Yao Cheng's team stated that this quarter's performance is "consolidating rather than disintegrating" the previous judgment - the external revenue growth rate of cloud business has increased to 40%, AI revenue has reached 9 billion yuan, and profit margin has increased by 110 basis points year-on-year. These are positive signals.
Analysts predict that the market's consensus expectation for Alibaba's 2027 fiscal year profit will be significantly lowered, and predict that the stock price will have a negative reaction to performance - but in reality, the stock price has surged by 8%, indicating that the market's pricing weight for AI commercialization prospects has exceeded short-term profits.
For Tencent, analysts have expressed a more optimistic view. The research report believes that Tencent's core engines (WeChat ecosystem, advertising, and gaming) still have resilience, and the impact of AI storytelling on stock price direction will be greater than profit growth. At present, the proportion of AI in Tencent's stock price is relatively low. If it can demonstrate clear execution and product market fit by 2026, it is expected to create upward space.
In terms of Wall Street ratings, JPMorgan maintains an "increase" rating on Alibaba's US stock with a target price of $200; Maintain an "increase in holdings" of Tencent with a target price of HKD 690. Citigroup maintains a 'buy' position on Alibaba's US stock, raising its target price to $205; Maintain a 'buy' policy towards Tencent with a target price of HKD 783.
Common pressure: AI is easy to spend money on, but difficult to monetize
According to market analysis, the financial reports of the two companies jointly reveal a reality: China's largest technology company is striving to convert AI investment into new revenue, despite investing billions of dollars in data centers, research, and talent.
Alibaba has committed to investing approximately 380 billion yuan (about 56 billion US dollars) in AI over the next three years, making it one of the largest technology companies in China. Tencent President Liu Chiping previously stated that the AI new product investment plan for 2026 is at least twice the 18 billion yuan planned for 2025.
At the same time, both companies are facing external competitive pressure in their respective core businesses. Alibaba is engaged in a consumption war with Meituan and JD.com in the field of instant retail, with subsidies and discounts eroding profit margins; Tencent continues to compete with ByteDance for user duration, although its advertising business remains strong.
At the AI model level, the two companies also face competition from pure AI companies such as Moonshot and MiniMax - the latter's valuation has soared since its listing in January this year, attracting some investors' attention from traditional Internet giants.
24/7 Technology wrote that after the launch of the Tencent Hybrid 3 preview model, it quickly became the top user on the OpenRouter platform, with an increase of 10 times in internal token calls compared to the previous generation, and has been integrated into 131 products. Alibaba plans to separately list its chip manufacturing subsidiary, Pingtouge, in order to capture investors' strong interest in replacing Nvidia with Chinese domestic chips. Pingtouge's self-developed GPU has achieved large-scale production, with over 60% of its computing power serving external commercial customers.
The market's judgment is that sacrificing short-term profits yields a ticket to the AI era. As for the final value of this ticket, the answer is still on the way.
