Tencent has officially entered a new strategic cycle driven by investments in artificial intelligence, clearly signaling a priority on building long-term AI infrastructure rather than merely pursuing short-term profit growth.
At the latest earnings call, Tencent's management announced plans to at least double investments in mixed yuan and new AI products by 2026. To support the increasing AI investments, the company expects this year's share repurchase scale to be lower than in 2025. This shift from reducing buybacks to increasing AI investments quickly triggered market volatility, with the market's initial reaction appearing &#34;unhappy,&#34; as Tencent's ADR fell 4% during trading, and its major shareholder Prosus dropped 8%.
According to the Fengchao trading desk, Goldman Sachs pointed out in its latest research report that Tencent is at a &#34;mixed&#34; turning point. On one hand, AI is empowering its gaming and advertising businesses; on the other hand, the company is clearly shifting to an investment phase driven by new AI products. As a result, Goldman Sachs has lowered its earnings growth forecast for Tencent in 2026, expecting its adjusted net profit to grow by 7% year-on-year, down from the previous expectation of 10%.
Despite the pressure on short-term profit expectations, the market's future focus will shift to the repair of Tencent's valuation multiples. Goldman Sachs analysts believe that the next reactions from investors and the market will largely depend on Tencent's progress in integrating AI into its core business over the next few quarters, as well as the actual implementation effects of mixed yuan 3.0, yuanbao applications, and the intelligent agent ecosystem.
<h2>Downward Earnings Expectations: Surge in AI Investments Weighs on Short-Term Profits</h2>
Tencent's funding in the AI sector is significantly increasing, directly squeezing short-term profit margins.
Goldman Sachs analysts Ronald Keung and others stated in their report that due to increased operating expenses related to AI costs, Tencent's operating profit margin for the fiscal year 2026 is expected to narrow by 65 basis points.
Goldman Sachs has lowered its net profit expectations for Tencent in 2026 and 2027 by 1% to 2%, and has reduced its 12-month target price from HKD 752 to HKD 700.
According to data disclosed by Tencent, in the fourth quarter of 2025 alone, its investment in &#34;yuanbao&#34; and the mixed yuan large model reached RMB 1.6 billion, with total annual expenditures amounting to RMB 1.8 billion. This strategic investment is separately listed by the company as incubation for new businesses and early capital expenditures. Management expects investments in mixed yuan and new AI products to increase by more than double in 2026. As resources shift towards AI, revenue growth outpacing profit growth will become the norm in the short term.
Goldman Sachs expects Tencent's capital expenditures to reach RMB 100 billion and RMB 110 billion in 2026 and 2027, respectively, with computing resources prioritized for these core AI products.
<h2>Valuation Multiple Repair: Resilience of Core Business and AI Monetization Potential</h2>
Despite the downward earnings expectations, Goldman Sachs maintains a &#34;buy&#34; rating on Tencent, believing there is room for valuation multiple repair.
Goldman Sachs noted that Tencent's current forward price-to-earnings ratio is about 16 times, down from 18 times at the beginning of the year, and lower than international peers like META and Alphabet. The catalyst for valuation repair lies in the shift of Tencent's AI narrative—from a latecomer in foundational models to a beneficiary in the era of intelligent agent AI.
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The strong performance of core businesses provides a financial buffer for AI investments. In the fourth quarter of 2025, Tencent's total revenue grew by 13% year-on-year. The gaming business achieved a 22% growth driven by AI efficiency improvements, while revenue from marketing services also increased by 19% year-on-year, supported by upgraded AI advertising models.
Goldman Sachs maintains an optimistic outlook on Tencent's core business:
<blockquote>
Gaming Business: Revenue is expected to grow by 15% year-on-year in the first quarter of 2026 and by 12% for the full year. This is attributed to the resilience of evergreen games like &#34;Honor of Kings&#34; and &#34;Game for Peace,&#34; as well as the strong performance of the PC versions of &#34;Delta Force&#34; and &#34;Valorant.&#34; Additionally, the reduction in commission rates by Apple and Google app stores is expected to increase Tencent's total operating profit by 1.9%.
Marketing Services: Revenue is expected to grow by 17% year-on-year in the first quarter of 2026 and by 14% for the full year. The usage time of video account users increased by 20% in 2025, and the deepening cooperation with e-commerce platforms will continue to drive advertising revenue growth.
Financial Technology and Business Services (FBS): Revenue is expected to grow by 7% year-on-year in the first quarter of 2026 and by 9% for the full year. Wealth management revenue growth has slowed, but commercial payment volumes continue to rise; business services benefit from improved pricing conditions due to tight supply of memory and CPUs, as well as healthy growth in international cloud business.
</blockquote>
<h2>Valuation Repair Focused on New Product Timeline</h2>
In response to the market's short-term pessimism, Goldman Sachs believes that current AI pre-investments are expected to release considerable new value in the future, similar to Tencent's cloud business, which achieved robust profitability after initial investments. Compared to the valuation levels of global peers like Meta, Alphabet, or Alibaba, which generally range from 22 to 29 times, Tencent still has significant room for valuation repair.
The report emphasizes that this repair process will closely revolve around the evolution of Tencent's AI narrative. Investors need to closely monitor whether Tencent's advertising revenue can show signs of accelerated growth similar to Meta, as well as the timeline for key AI product releases.
This includes the expected release next month of the Hongyuan 3.0 large model, Yuanbao AI applications, WeChat AI assistant, and productivity AI agent tools including SkillHub, OpenClaw, and WorkBuddy, with actual commercial performance anticipated in the next 3 to 6 months.

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In order to double down on AI investments, Tencent is willing to cut back on share buybacks. Goldman Sachs expects this will put pressure on short-term profits, and while maintaining a "Buy" rating, has lowered the target price from HKD 752 to HKD 700, forecasting a net profit growth rate of only 7% next year. Whether the current low valuation of 16 times can be repaired depends on the commercial viability of products like Hongyuan 3.0, Yuanbao, and WeChat AI Assistant in the next 3 to 6 months

- Tencent has entered a new strategic phase driven by AI investments, prioritizing long-term infrastructure over immediate profit growth.  
- The company plans to double its investments in mixed and new AI products in 2026, resulting in a forecasted dip in its share buyback size and causing an initial market reaction of decline.  
- Despite lower profit expectations due to rising costs from AI-related expenditures, analysts maintain a "buy" rating on Tencent, suggesting potential for valuation recovery as its core businesses remain resilient.

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Tencent enters the "AI cash-burning phase," and the market's first reaction is "unhappy." The key to victory lies in the "AI progress in the next few quarters."