Tencent’s AI spending surge ends profit growth streak

Tencent Holdings reported second-quarter revenue of 204.8 billion yuan ($30.36 billion) on Wednesday, an 11% year-on-year increase that beat analyst estimates, but net profit rose just 0.7% to 56 billion yuan as surging artificial intelligence investment weighed on earnings and ended the company's double-digit profit growth streak dating back to 2023.cnbc+1

The profit figure missed analyst expectations of 61.8 billion yuan, according to LSEG data, as capital expenditure surged to 52.8 billion yuan in the quarter from 19.1 billion yuan a year earlier.finance.yahoo+1

AI Spending Accelerates

The Wall Street Journal News Corp ↘ 3.58% reported that the results marked the end of Tencent's consecutive quarters of double-digit earnings growth, coinciding with plans to more than double AI investments this year focused on foundational models and AI agents. General and administrative expenses rose 22% to 38.8 billion yuan, reflecting higher research and development costs for the company's Hy models and Weixin AI initiatives.wsj+1

The spending push drove Tencent into negative free cash flow of 13.8 billion yuan for the quarter, while net cash fell to 58.2 billion yuan from 146.9 billion yuan at the end of March.investing

Gaming and Advertising Drive Top Line

Domestic games revenue grew 17% to 47.3 billion yuan, supported by titles including Delta Force, Valorant, and Honor of Kings — a sharp acceleration from the 6% growth seen in the first quarter. Marketing services revenue climbed 22% to 43.6 billion yuan, boosted by AI-driven ad recommendations and Tencent's AIM+ automated advertising platform. International games revenue dipped 0.8% to 18.6 billion yuan due to foreign currency movements.businesstimes+2

AI Product Push Intensifies Competition

Tencent released Hy3, the latest version of its Hunyuan AI model, in July and opened it to users worldwide last week. The company has also been testing Xiaowei, an agentic AI assistant inside its WeChat messaging app, since June. Enterprise products WorkBuddy and CodeBuddy are achieving what Tencent described as breakout user growth.cnbc+2

The company faces intensifying competition in China's AI landscape from Alibaba ↘ 4.74%, ByteDance, and newer entrants including DeepSeek and Moonshot AI. Tencent's shares were down 26% year-to-date at Wednesday's close in Hong Kong, as investors weigh the company's rising spending against the competitive pressure in AI.cnbc