Tencent Capex to Swell Over 130B Yuan on AI Arms Race

Tencent Holdings Ltd. is preparing for a massive surge in AI-related spending, with analysts forecasting capital expenditures could reach up to 150 billion yuan in 2026, sparking investor concerns over spending discipline even as its AI investments begin to boost revenue.

"The 1Q26 disclosure framework substantially reduced overhang surrounding AI investments, which had previously weighed on its multiples," JP Morgan analysts said in a report, while reiterating their Overweight rating on the stock.

The Chinese tech giant reported first-quarter capex of 37 billion yuan, a figure that implies a full-year outlay of 130-150 billion yuan, well above 2025 levels. This comes as Tencent’s non-IFRS net profit rose 11% year-over-year to 67.9 billion yuan, with an upgraded AI-driven advertising model helping accelerate ad revenue growth to 20 percent.

The spending spree places Tencent deeper into the global AI arms race, where funding for AI startups reached a record $255.5 billion in the first quarter of 2026 alone, according to data from PitchBook. While the investments are already showing results, the scale of the capex hike may test investor patience and weigh on the company's valuation, which JP Morgan described as being at a trough.

AI Investments Bear Fruit

Tencent's first-quarter results showed tangible returns from its AI push. The company's fintech and business services segment, which includes its cloud offerings, saw revenue climb to 60 billion yuan. Business Services revenues specifically rose by 20 percent year-on-year, a jump the company attributed to higher demand for cloud services, including AI-related offerings.

"An upgraded AI-driven ad recommendation model drove an acceleration in advertising revenue growth to 20%," Ivan Su, senior equity analyst at Morningstar, told CNBC. He noted that AI spending was tracking in line with management's previous full-year guidance. The company also highlighted that its AI agent tool, WorkBuddy, was the most popular service of its kind in China.

Despite the positive AI momentum, overall revenues of 196.5 billion yuan missed analyst forecasts of 199 billion yuan, partly due to a slowdown in gaming revenue growth. However, Morningstar's Su suggested this was likely due to the timing of the Lunar New Year affecting revenue recognition rather than a fundamental demand issue.

Risks of an Arms Race

The primary risk, according to JP Morgan, is the sheer scale of the spending. The projected 130-150 billion yuan in full-year capex "may reignite market concerns over AI spending discipline," the bank's report stated. This level of investment mirrors a global trend where a few large players are consolidating capital. In the first quarter, just three companies—OpenAI, Anthropic, and xAI—accounted for $172 billion, or 67 percent, of all AI venture funding.

JP Morgan also pointed to two other risks: the possibility that one-off tailwinds flattered first-quarter growth, and that an expanding scope of "new AI products" could make it harder for analysts to track the company's performance cleanly.

For investors, the situation presents a trade-off. Tencent is a "high-quality earnings compounder at trough valuation," according to JP Morgan. The firm's Overweight rating suggests confidence in the long-term strategy. However, the path there involves navigating the immense costs of competing in the AI sector, a challenge that will likely keep a check on profitability in the near term as the company balances its core business growth with its ambitions to be a foundational player in the next wave of technology.

This article is for informational purposes only and does not constitute investment advice.