Key Takeaways
Tencent Holdings Ltd. posted a 9 percent rise in first-quarter revenue that missed analyst expectations, with Chief Executive Officer Ma Huateng offering a frank admission of the company’s stumbles in the global artificial intelligence race.
“A year ago, we thought we had boarded the AI ship, only to find it was leaking,” Ma told shareholders on May 13. “Now we are standing on it but can't sit down yet.”
The remarks followed a report showing revenue climbed to 196.5 billion Chinese yuan ($28.9 billion), falling short of the 199 billion yuan average analyst forecast compiled by LSEG. The miss was largely due to a 6 percent growth rate in domestic games, which saw revenue recognition shift out of the quarter. Non-IFRS net profit attributable to equity holders rose 11 percent to 67.9 billion yuan.
For investors, the comments highlight the immense pressure on the Chinese social media giant to prove its AI strategy can deliver growth and compete with rivals like Alibaba and ByteDance. While President Liu Chiping confirmed "no major layoff plans," a contrast to Western tech peers, Ma's metaphor underscores the execution risk in turning its new Hy3 large language model into profitable products.
The clearest return on Tencent's AI spending came from its advertising and cloud segments. Marketing Services revenue jumped 20 percent to 38.2 billion yuan, an acceleration from the previous quarter, which the company credited to an upgraded AI-driven ad recommendation model.
“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.
Business Services revenues also rose by 20 percent year-on-year, supported by higher demand for cloud and AI-related services. Tencent said its productivity tool, WorkBuddy, is now the most widely used AI agent service in China by daily active users. The company’s new Hy3 preview model has been the most-used model on the open-source testing platform OpenRouter since late April, measured by token usage, suggesting competitive performance.
The company's traditional growth engine, domestic gaming, posted revenue of 45.4 billion yuan. While this was up 6 percent, it represented a significant slowdown from the 24 percent rise seen a year earlier. Management attributed the lag to the timing of the Chinese New Year holiday, which pushed some revenue recognition into the second quarter.
Evergreen titles like Honour of Kings and Peacekeeper Elite continued to perform, but the results point to a mature domestic market where Tencent must fight for growth. International games provided a stronger showing, with revenue up 13 percent to 18.8 billion yuan, led by titles including Clash Royale and Wuthering Waves.
Tencent's AI push comes as global capital increasingly flows into Asia's technology infrastructure leaders. As noted by Todd Gordon of Inside Edge Capital, a broader rotation is underway from US tech to the AI supply chain in South Korea, Taiwan, and China, a region he dubs "Seoul-icon Valley." This trade focuses on the memory, networking, and power components essential for the AI revolution.
While Tencent is focused on the software and platform layer, its success is linked to this hardware ecosystem, where peers like Samsung, SK Hynix, and Alibaba are also major players. Tencent's ability to build cost-efficient and powerful models like Hy3 depends on this regional supply chain. The company's reported 16 percent year-on-year increase in capital expenditure to 31.9 billion yuan reflects this intense investment cycle. The market is watching to see if Tencent's software can keep pace with the hardware boom, or if its "leaking ship" will be left behind.
This article is for informational purposes only and does not constitute investment advice.
