Tencent Q1 Net Profit Beats Expectations, Up 21%, But Revenue Below Forecast, AI Capital Expenditure Reaches 37 Billion Yuan

Tencent's financial report for the first quarter of 2026 presents a mixed picture: profits exceeded expectations, but revenue fell slightly short.

Total revenue increased by 9% year-on-year to 1964.58 billion yuan, below the average analyst forecast of 1993.9 billion yuan; net profit attributable to shareholders of the company was 580.93 billion yuan, surpassing the market expectation of 577.6 billion yuan, with a significant year-on-year increase of 21%; operating profit was 67.38 billion yuan, also exceeding expectations of 65.65 billion yuan, with a year-on-year increase of 17%; gross profit was 111.265 billion yuan, with a year-on-year increase of 11%.

Core business grows steadily, marketing services lead the way

All three business segments recorded growth, but with significant differentiation.

Marketing services was the brightest segment this quarter, with revenue increasing by 20% year-on-year to 38.171 billion yuan, accelerating compared to the previous quarter, benefiting from the upgrade of AI-driven advertising recommendation models and the expansion of WeChat ecosystem closed-loop marketing capabilities, with noticeable increases in advertising spending from internet service, e-commerce, and gaming industry advertisers.

Revenue from financial technology and enterprise services increased by 9% year-on-year to 59.885 billion yuan, with the growth in demand for commercial payments, wealth management services, and cloud services being the main driving forces, among which enterprise service revenue increased by 20% year-on-year.

Value-added services revenue increased by 4% year-on-year to 96.11 billion yuan, with perennial games such as "Honor of Kings," "Peace Elite," and "Delta Action" all achieving new highs in revenue, but domestic market gaming revenue of 45.4 billion yuan was slightly lower than the expected 47.22 billion yuan, and social networking revenue of 31.9 billion yuan was also below the expected 33.48 billion yuan.

WeChat and WeChat monthly active accounts reached 1.43 billion, slightly exceeding expectations of 1.42 billion.

AI layout: Hy3 goes live, but there is still a gap

Tencent stated that the beginning of 2026 has seen significant breakthroughs in new AI products. The restructured AI research and development team has rebuilt the AI infrastructure and built the Hy3 preview model; since its launch on April 28th, Hy3 has become the most widely used model on OpenRouter in terms of token consumption.

The efficiency AI Agent service, WorkBuddy, has become the most widely used efficiency AI Agent service in China in terms of daily active accounts.

However, Nomura Securities analysts pointed out in a research report prior to the financial report that Hy3 still lags behind Moonshot and DeepSeek in core metrics such as programming capabilities and language details.

Tencent also relies on DeepSeek to support its main AI chatbot, which is quite unique among major domestic internet companies. "Tencent's close cooperation with DeepSeek is an important fall-back option in case its self-developed Hy model cannot enter the top ranks." He wrote.

AI monetization pressure rises, capital expenditure increases significantly

The slightly lower-than-expected revenue has amplified the market's anxiety about the return timeline of Tencent's AI transformation.

Tencent has committed to at least doubling its investment in AI this year to over 36 billion yuan, with capital expenditure reaching 37 billion yuan in this quarter, mainly for AI-related investments. The free cash flow for the first quarter was 56.7 billion yuan, and the net cash generated by operating activities was 101.4 billion yuan. As of March 31st, the net cash was 146.86 billion yuan.

Chinese technology giants are facing investor skepticism about the monetization pace of AI, and Tencent's capital expenditure is still relatively conservative among domestic peers: Alibaba has promised a rolling investment target of over 50 billion USD over three years, and the gap in capital expenditure between Chinese and American technology companies is even more striking—Amazon, Google, Meta, and Microsoft plan a combined capital expenditure of over 700 billion USD this year.

Tencent views WeChat as a natural launching pad for AI Agents, planning to automate tasks such as taxi hailing and travel bookings through this super app, but has not yet provided a clear launch timetable.

Market value shrinks, investors turn to pure AI targets