Tencent delivered robust second-quarter performance, achieving its fastest revenue growth in four years and record gross margins. Goldman Sachs believes this further confirms that Tencent is among the Chinese internet companies best positioned to benefit from AI applications.
On August 14, Goldman Sachs released a research report analyzing Tencent's second-quarter results, highlighting how AI empowerment and advertising growth are driving strong business recovery. Goldman Sachs identified the following highlights from Tencent's earnings:
**AI is No Longer a Concept, But a Growth Engine:** AI technology has significantly enhanced advertising conversion efficiency and gaming development and operational efficiency, directly driving these two high-quality revenue segments to achieve over 20% year-over-year growth for two consecutive quarters.
**Massive Growth Potential in Advertising Business:** Tencent's advertising business, particularly on Channels (Shipin Hao), has significantly lower ad load rates compared to peers, indicating a multi-year growth runway. Goldman Sachs expects advertising revenue to grow 19% and 16% in fiscal 2025 and 2026, respectively.
**Enhanced Gaming Business Certainty:** Through its "platform-based" gaming strategy and major new releases like "Delta Force" and the mobile version of "VALORANT," Tencent's gaming business volatility has decreased with more solid growth prospects.
The research analysis indicates that AI technology is comprehensively empowering Tencent's various business lines, including gaming, advertising, fintech, cloud services, and e-commerce. Among these, gaming and marketing services, two premium revenue sources, have maintained over 20% year-over-year growth for two consecutive quarters.
Based on this, Goldman Sachs has raised its 2025-2027 revenue and earnings per share forecasts for Tencent by 1-6%, upgrading the target price from HK$658 to HK$701.
**AI Technology Comprehensively Empowering Accelerated Business Growth**
Goldman Sachs points out that AI technology has become the core driving force behind accelerated growth across Tencent's business lines. Specifically:
**Advertising Business:** The advertising business has achieved over 20% year-over-year growth for two consecutive quarters. This is primarily driven by AI-powered advertising foundation model upgrades that significantly improved click-through rates and conversion rates. Advertising revenue from Channels, Mini Programs, and WeChat Search grew 50%, 50%, and 60% year-over-year, respectively.
**Gaming Business:** Second-quarter gaming revenue grew 22% year-over-year, with Value-Added Services (VAS) gross margins reaching historic highs. AI played a crucial role, including generating more realistic NPCs (non-player characters) and virtual teammates, accelerating content production, and improving player acquisition marketing efficiency.
**Cloud Business:** The enterprise services segment achieved high double-digit growth, with AI-related GPU leasing and API token sales serving as key drivers.
Goldman Sachs noted that despite facing chip supply constraints, Tencent's actual capital expenditure performance exceeded expectations.
Given that artificial intelligence is the key point for empowering/accelerating Tencent's core business growth, Goldman Sachs analysts have raised Tencent's fiscal 2025 capital expenditure forecast from RMB 73 billion to RMB 90 billion, while fiscal 2026 capital expenditure has been increased from RMB 87 billion to RMB 102 billion.
**Gaming Business Platform Strategy Unleashing Growth Potential**
The report believes that Tencent's "platform-based" gaming strategy is helping it move away from dependence on single blockbuster games, thereby reducing performance volatility.
Goldman Sachs has therefore raised its gaming revenue growth expectations for Tencent's fiscal 2025 and 2026 from the previous 15% and 8% to 18% and 11%, respectively. The confidence in growth primarily stems from the following aspects:
**"Delta Force" Shows Tremendous Potential:** The game has already shown potential to become "the next franchise-level evergreen game." In July, its daily active users (DAU) ranked among the industry's top five, with revenue ranking third. Goldman Sachs predicts the game will achieve approximately RMB 9 billion in annualized revenue (RMB 6.5 billion mobile, RMB 2.4 billion PC).
**"VALORANT" Mobile Version Launching Soon:** Scheduled to launch on August 19, the mobile version of "VALORANT" is another short-term growth engine. The game has already garnered over 60 million pre-registrations on mobile, while the PC version's DAU reached new highs in Q2. Goldman Sachs predicts its annualized revenue will reach RMB 7 billion.
**Evergreen Games Remain Resilient:** Core games like "Honor of Kings" and "PUBG Mobile" continue to perform steadily, contributing sustained growth.
**Advertising Business High Growth is Sustainable, Monetization Potential Far from Exhausted**
The advertising business was another major highlight of this earnings report.
Goldman Sachs believes its high growth is sustainable and has raised marketing services revenue growth expectations for fiscal 2025 and 2026 to 19% and 16%, respectively. The growth runway is clearly visible:
**AI-Driven Efficiency Improvements:** AI technology continues to optimize advertising click-through rates and conversion rates, delivering higher ROI for advertisers.
**Accelerated Commercialization of Channels and Search:** Revenue from Channels and WeChat Search grew 50% and 60% year-over-year in Q2, respectively. More importantly, Channels currently has ad load rates in the low-to-mid single digits percentage, while peers have reached mid-to-high double digits, indicating enormous long-term monetization potential.
**Transaction Loop Enhances Revenue Per Click:** Through Mini Program e-commerce loops, Tencent can effectively increase revenue per click. In Q2, advertising revenue from Mini Programs grew 50% year-over-year.
Goldman Sachs believes Tencent remains one of the Chinese internet giants with the most visible and sustainable profitable growth prospects. However, future risks still warrant attention, including intensified advertising industry competition, unexpected delays in game releases/license approvals, fintech and cloud business growth below expectations, and reinvestment risks.
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