Over the past two years, market anxiety surrounding AI has fundamentally stemmed from one question: when will the massive capital expenditures finally translate into profits. On May 13th, Tencent and Alibaba released their Q1 2026 financial results on the same day. Their reports indicate that Alibaba is strongly emphasizing its "AI has moved beyond the initial investment phase into a period of scaled commercial returns," while Tencent, which has been relatively more cautious in its AI investments over the last two years, focused more on "breakthroughs with new AI products."
In detail, for Q1, Alibaba Cloud's external commercial revenue growth accelerated to 40%, its fastest pace in nine quarters. Within this, revenue from Alibaba's AI-related products accounted for 30% of the cloud's external commercial revenue, marking eleven consecutive quarters of triple-digit year-over-year growth, with revenue reaching 8.971 billion yuan.
Concurrently, Alibaba disclosed its AI-related Annualized Recurring Revenue (ARR) for the first time, widely seen as a signal of commercial realization. Reportedly, in Q1, ARR from Alibaba's AI-related products exceeded 35.8 billion yuan. During the Q4 FY2026 earnings call on May 13th, Alibaba Group CEO Eddie Wu projected that ARR for AI model and application services, including the Bailian MaaS platform, would surpass 10 billion yuan in the June quarter and exceed 30 billion yuan by year-end.
However, the financial report shows that Alibaba recorded an operating loss of 848 million yuan in Q1, compared to an operating profit of 28.465 billion yuan in the same period of 2025. This was primarily due to increased investments in technology businesses, instant retail, and user experience, leading to a 84% year-over-year decline in adjusted EBITA to 5.102 billion yuan.
Tencent did not directly disclose revenue from its AI-related products but noted that its enterprise services revenue grew by 20% year-over-year in Q1, mainly driven by increased overseas demand (including for AI-related services) and a more favorable pricing environment. Regarding profitability, Tencent's Q1 revenue reached 196.5 billion yuan, a 9% increase year-over-year, slightly below market expectations; gross profit was 111.3 billion yuan, up 11%; Non-IFRS operating profit was 75.6 billion yuan, a 9% increase.
Excluding the impact of new AI products, Non-IFRS operating profit would have grown 17% year-over-year to 84.4 billion yuan. This implies that products like Hy, Yuanbao, CodeBuddy, WorkBuddy, and QClaw resulted in a profit drag of approximately 8.8 billion yuan for Tencent in Q1 2026. Tencent President Martin Lau stated during the March earnings call that Tencent invested 18 billion yuan in new AI products in 2025 and plans to at least double that amount in 2026. Currently, Tencent is indeed increasing its capital expenditures for AI. The financial report shows Tencent's Q1 2026 capital expenditures reached 31.936 billion yuan, an increase of about 63% quarter-over-quarter and approximately 16% year-over-year.
At the Tencent shareholders' meeting on May 13th, Pony Ma remarked that Tencent's early foundational capabilities in AI were not outstanding. In recent years, the company has been addressing its shortcomings through talent development, team management, and internal training, and is now gradually getting on track. Addressing external skepticism about Tencent lagging in AI, Ma candidly stated, "A year ago, we thought we had boarded the ship, only to find it was leaking. Now it feels like we're standing on it but can't sit down yet. We still hope the ship can speed up."
The solid and sustained growth of its core businesses provides Tencent with the confidence to subsequently increase its AI investments. For over a decade, Tencent's greatest strength has been transforming traffic and social relationship chains into a commercial ecosystem. In the AI era, it is attempting to turn its WeChat ecosystem, gaming ecosystem, and content ecosystem into new AI distribution channels. This is also Tencent's most significant distinction compared to other Chinese internet companies.
If investors previously valued Tencent more for its ability to "make steady profits," the market is now adding a new layer of valuation imagination: whether it will become one of China's largest super-application platforms in the AI era. As the global AI competition enters a new phase, Tencent must demonstrate more tangible achievements in AI.
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