Is AI a "money-burning beast" or a "money-printing machine"? The entire tech industry is waiting for the answer.
In this AI arms race that no one dares to miss, tech giants are anxiously spending massive capital while painting grand visions of the future for the market. However, amid the smoke of companies casually investing hundreds of billions, the market needs substantial proof of current returns.
Tencent responded first with a truly stunning performance report.
On August 13, Tencent released its Q2 2024 financial results. Despite capital expenditures surging 119% year-over-year to RMB 19.11 billion, its profitability remained unimpaired. During the reporting period, Tencent's total revenue reached RMB 184.5 billion, up 15% year-over-year, marking the highest quarterly growth rate in four years. Meanwhile, Non-IFRS net profit attributable to shareholders hit RMB 63.052 billion, up 10% year-over-year, far exceeding market expectations.
Burning money on AI while simultaneously earning beyond expectations - the capital market's reaction was immediate and enthusiastic.
Catalyzed by these financial results, Tencent's valuation reappraisal journey reached its climax. Since the beginning of this year, Tencent has gained over 41%, with its total market capitalization recently breaking through the HK$5 trillion barrier. Its share price even touched HK$600 per share on August 14, reaching a nearly four-year high.
This AI-driven robust growth marks that Tencent's AI strategy has transitioned from the "storytelling" investment phase to a virtuous cycle where core businesses "generate blood" to support further development. It has also reignited market imagination about its potential to challenge the peak market cap of over HK$7 trillion again.
However, the endgame of this competition is far from over. To answer the ultimate question of "whether AI can unlock the next trillion in growth," Tencent still needs to provide more answers.
**AI Revitalizes Three Core Business Segments**
After two to three years of transformation, signals of Tencent's return to an expansion cycle are becoming increasingly evident.
It's worth noting that in 2022, affected by the macroeconomic environment, internet regulation, and weak business growth, Tencent's revenue declined for the first time, falling 1% year-over-year to RMB 554.6 billion. Subsequently, Tencent began comprehensive reforms, mainly focusing on cost reduction, efficiency improvement, and shrinking non-core businesses.
Decisive strategic adjustments brought Tencent's revenue back to double-digit growth. From Q4 2023 to Q3 2024, Tencent's quarterly revenue growth rates were all below 10%, recovering to 11% in Q4 last year and rising to 13% in Q1 this year.
By Q2, Tencent's revenue growth reached 15%, the highest quarterly revenue growth rate in four years.
Looking at specific business segments, social networks account for 18% of revenue, domestic gaming 22%, international gaming 10%, advertising 19%, and fintech and enterprise services 30%.
Gaming remains Tencent's pillar business and the key driver of total revenue growth. The financial report shows that in Q2, Tencent's gaming business revenue reached RMB 59.2 billion, up 22% year-over-year. Domestic market gaming revenue was RMB 40.4 billion, up 17% year-over-year, while international market gaming revenue was RMB 18.8 billion, up 35% year-over-year.
This marks Tencent Gaming's third consecutive quarter maintaining over 20% growth, shaking off the gloom of the previous two years and beginning to show renewed vigor.
For comparison, in 2023, Tencent's domestic and international gaming revenue only saw minimal growth, with both declining in Q4. By Q1 last year, gaming business revenue was still unsatisfactory, declining 0.4% year-over-year to RMB 48.1 billion, with overseas gaming growing 3% and domestic gaming falling 2% year-over-year.
To boost gaming business morale, Pony Ma stated at the annual meeting early last year that gaming is Tencent's ace business, currently claiming to be the world's largest gaming company, seemingly resting on its laurels.
The turning point for the gaming business occurred in Q2 last year, when driven by DNF Mobile, Tencent Gaming shook off its gloom. Domestic market revenue resumed growth, overseas revenue accelerated, with both domestic and international segments growing 9% year-over-year, exceeding expectations.
Facing the gaming business achievements, Pony Ma praised generously early this year, calling its overall performance last year "very impressive" and stating that "the entire organizational structure and team spirit have greatly improved."
Regarding the reasons for Q2 gaming business achieving strong growth again, Pony Ma pointed out that evergreen games like "Honor of Kings" and "Game for Peace" are evolving into platform-type products, with both user engagement time and revenue increasing. Meanwhile, new games like "Delta Force" are also performing strongly.
Additionally, Tencent mentioned that AI is becoming increasingly important in driving gaming growth, manifesting in game content creation, player engagement, and monetization.
Beyond gaming, Tencent's advertising revenue also maintained high growth. In Q2 this year, Tencent's marketing services business revenue reached RMB 35.8 billion, up 20% year-over-year, exceeding industry average levels.
Tencent attributes this growth mainly to AI-driven advertising platform improvements and enhancements to WeChat's transaction ecosystem, driving strong advertiser demand for Video Accounts, Mini Programs, and WeChat Search. Revenue from marketing services across Tencent's major industries all increased this quarter.
Notably, Tencent's B2B business revenue also significantly improved. In Q2, revenue from fintech and enterprise services reached RMB 55.5 billion, up 10% year-over-year, representing the best year-over-year growth rate for this business segment in the past six quarters.
Tencent attributes the growth in fintech services revenue to increased revenue from consumer lending services, commercial payment activities, and wealth management services. Meanwhile, enterprise services revenue growth accelerated compared to recent quarters, benefiting from increased enterprise customer demand for AI-related services, including GPU leasing and API token usage, as well as growth in merchant technology service fees.
While achieving high business growth, Tencent's workforce also returned to expansion mode. By the end of Q2 this year, Tencent's total employee count reached 111,221, an increase of 1,807 from the previous quarter and 5,715 year-over-year.
**Yuanbao Shoulders Heavy Responsibility**
Regarding Q2 highlights in AI development, Pony Ma pointed out that Tencent is committed to bringing AI benefits to broader consumers and enterprises by supporting more application scenarios within the WeChat ecosystem and driving user growth for AI-native application "Yuanbao," while continuously enhancing Tencent's Hunyuan foundation model capabilities.
Tencent management also stated that AI has contributed to the growth and monetization of Tencent's existing businesses in various ways (such as advertising and gaming). Therefore, even though current AI products find it difficult to charge users directly, growth in Tencent's other businesses can provide a form of subsidy for the costs of providing free AI services to users.
In Tencent's AI product matrix, Yuanbao holds a prominent position as the pioneer for seizing the next generation of top-tier traffic entrances.
Changing from last year's low-profile approach, Tencent also began heavily investing in user acquisition for Yuanbao this year, especially in February and March. Against this backdrop, from February to March, Yuanbao's daily active users (DAU) grew 20-fold, once becoming China's third-ranked AI-native mobile application by DAU, with monthly active users once exceeding 40 million.
However, Tencent did not maintain high-intensity promotion for Yuanbao consistently. QuestMobile data shows that by May this year, Yuanbao's monthly active user scale fell back to 22.56 million, while DeepSeek and Doubao had approximately 170 million and 130 million respectively during the same period.
It's evident that despite backing from Tencent, Yuanbao still faces considerable challenges in becoming an AI super-app.
During this earnings call, an investor asked Tencent management why they don't aggressively invest to help Yuanbao seize market dominance.
Tencent management responded that Tencent has already invested heavily in AI and will continue increasing investment in the future. However, this must be smart investment, not simply burning money on chips, recruiting teams, and marketing. "We need to invest at the right pace."
They also mentioned that Tencent indeed invested significant resources in promoting Yuanbao in Q1 and successfully acquired a considerable user base. Q2's core task was optimizing the product and improving retention.
"When we achieve this, we will likely increase promotional efforts again." However, management also clearly stated that future promotion won't just be spending money on user acquisition, as Tencent has numerous existing platforms (such as WeChat, QQ) that can be leveraged. Deep integration of "Yuanbao" with Tencent's existing platforms is a unique and very important advantage and leverage.
Therefore, in the coming months, besides increasing promotional efforts again, Tencent will do more work on integrating Yuanbao with existing national-level applications.
**AI is a Long-term Battle**
AI has undoubtedly become Tencent's most important strategy currently. However, the essence of AI competition is not a blitzkrieg seeking gains in individual battles, but a prolonged war concerning capital, technology, and strategic vision.
The capital market has given clear rewards for Tencent's strategic persistence: driving its market cap back to HK$5 trillion, reaching a nearly four-year high. This fully demonstrates that the market recognizes AI's "repair and empowerment" value for Tencent's core businesses, which is the foundation supporting its current valuation.
However, going from HK$5 trillion to HK$7 trillion or even higher will require not the logic of "repair" but a completely new story of "creation." To return to the market cap peak, Tencent must answer a core question: Beyond making old businesses better, can AI create an entirely new, sufficiently large incremental business?
Regarding this, Tencent also showed more clearly at the earnings conference how AI will drive performance growth going forward.
The financial report shows Tencent continues increasing AI strategic investment, with Q2 R&D investment up 17% year-over-year to RMB 20.25 billion, and capital expenditure up 119% year-over-year to RMB 19.11 billion, down 30% quarter-over-quarter.
Since strategic acceleration began in Q4 last year, Tencent's cumulative capital expenditure reached RMB 83.16 billion, mainly used to support AI-related business development.
At the March earnings conference, Tencent announced that based on last year's record-high capital expenditure of RMB 76.7 billion, it would further increase capital expenditure in 2024. In R&D, it will continue investing in proprietary models and accelerate AI application development across business groups. Meanwhile, Tencent will also invest in marketing to improve user awareness and adoption rates for new AI products like Yuanbao.
At this earnings conference, Tencent management stated that Tencent has sufficient chips for existing model training and continuous upgrades. Additionally, Tencent is improving inference efficiency through extensive software-level optimizations, enabling it to handle more workloads on the same number of chips.
Meanwhile, Tencent management indicated that they have not yet modified full-year capital expenditure guidance.
Regarding AI investment's impact on profitability, Tencent stated that AI-related depreciation costs will indeed continue rising, but simultaneously, benefits Tencent derives from AI are also continuously emerging. "The pace of these two (costs and benefits) may not match perfectly, but their long-term trends are both positive."
Under firm investment, Tencent's overall AI product matrix is becoming increasingly complete, building a "1+3+N" AI comprehensive ecosystem centered on Tencent's proprietary Hunyuan large model as the core engine, constructing a complete architecture covering platform capabilities and diverse applications.
Tencent's AI application blueprint consists of two major parts: first, AI-native applications including AI assistant "Tencent Yuanbao," AI intelligent workspace "ima," and AI search "QQ Browser"; second, Tencent ecosystem applications fully integrated with AI capabilities, such as WeChat, QQ, QQ Music, Tencent Meeting, Tencent Docs, and Tencent Maps.
First Shanghai Securities analysts believe Tencent's continuous investment in AI capabilities and platform-level synergy strategy has begun showing results, with core scenarios including advertising, gaming, and WeChat AI all building new growth momentum. Based on 2024 profit forecasts, they maintain Tencent's target price at HK$660, close to Tencent's historical stock price peak.
In this global AI competition, Tencent's biggest advantage lies in its massive user base and scenarios. It has also clarified its strategy of focusing on making "good products," aiming to comprehensively integrate "usable, user-friendly, and useful" AI tools into the digital daily lives of 1.4 billion people.
Using AI to reinforce its fundamentals, Tencent has successfully established a solid foundation for its expedition to return to the peak. The air and supplies here are sufficient to support fighting a brutal prolonged war.
This financial report can be seen as Tencent winning the first key battle in this expedition. It greatly boosted market confidence and proved the preliminary effectiveness of its strategic path. However, from winning one battle to winning the entire war remains a "long march" full of variables and challenges. Technology may be disrupted, and competitors are also rapidly evolving.
Looking upward, the HK$7 trillion peak remains shrouded in clouds. Whether it can ultimately reach the summit no longer depends on the expedition team's endurance, but whether they can find a completely new, untrodden climbing route - that path lies across the unknown territory of AI-native applications.
Comments