Earnings Preview | AI Capital Spending Peaks, Tencent's 3 Key Businesses Drive Q3 Growth

Tencent will release its third quarter results for the 2025 fiscal year on November 13. Based on data from Tiger International APP, TENCENT's third-quarter revenue is projected to be 188.9 billion yuan, a year-on-year increase of nearly 13%; adjusted earnings per share is expected to be 6.99 yuan, growing over 10% year-on-year.

Following the better-than-expected growth achieved through deep integration of AI technology and core business in the second quarter, the continuity of its growth momentum this quarter, the extent of AI commercialization, and the room for improvement in profit quality are of high interest.

I. Review of Last Quarter's Performance: AI Empowers All Businesses, Exceeds Growth Expectations

The second quarter of the 2025 fiscal year was a crucial validation period for TENCENT's "AI + Ecosystem" strategy. Multiple core financial metrics not only achieved double-digit growth but also showcased the effectiveness of business structure optimization driven by technology, laying a solid foundation for annual growth.

Overall, its financial performance saw total quarterly revenue reaching 184.5 billion yuan, growing 15% year-on-year, substantially outpacing the industry average growth rate; profitability continued to enhance with gross profit increasing 22% year-on-year to 105 billion yuan, and non-GAAP operating profit of 69.2 billion yuan, marking an 18% year-on-year increase, proving ongoing improvements in operational efficiency. Notably, despite high-intensity strategic investments, the company's financial condition remains strong, with free cash flow maintaining a robust level of 43 billion yuan, providing ample financial support for subsequent AI research and ecosystem expansion.

Under the empowerment of AI, TENCENT's three core business divisions displayed a trend of synergistic growth. Revenue from value-added services, including gaming, grew 16% year-on-year to 91.37 billion yuan, with the gaming business particularly impressive—up 22%, sustaining a growth rate above 20% for three consecutive quarters. In domestic markets, gaming revenue reached 40.4 billion yuan (+17%), while international revenue reached 18.8 billion yuan, growing 35% year-on-year, marking four straight quarters of historical highs; overseas markets have become a key growth driver for the gaming business. Marketing services (advertising) continued its high growth trajectory, with revenue reaching 35.76 billion yuan, up 20% year-on-year, achieving double-digit growth for eleven consecutive quarters, with AI-driven advertising technology upgrades and WeChat ecosystem optimization as core drivers. Financial technology and enterprise services saw significant improvement, with revenue hitting 55.54 billion yuan, growing 10% year-on-year, supported by increased consumer loans and commercial payments as well as rising demand for enterprise AI services.

Investment in technology and the effect of implementation formed a positive feedback loop. In the second quarter, R&D investment increased 17% year-on-year to 20.25 billion yuan, while capital expenditure surged 119% year-on-year to 19.11 billion yuan; since the strategic acceleration in Q4 2024, cumulative capital expenditure has reached 83.16 billion yuan. The breakthrough of the hybrid AI model was particularly notable, with its multi-modal understanding model ranking top in LMArenaVision domestically, and its 3D model ranking first on HuggingFace, which has been widely applied in scenarios like gaming digital asset generation and ad material creation, achieving rapid conversion from technological R&D to commercial value.

II. Focus of This Quarter's Performance: AI Deepening, Three Dimensions Dictate Growth Quality

In the third quarter of the 2025 fiscal year, TENCENT faces dual tests of sector competition and technology investment during the key period of AI technology commercialization. Three core focal points will determine the final performance of this quarter's results.

1. Continuity of Core Business Growth Momentum

The resilience of growth across the three business lines is the core concern for the market. In the gaming business, quarterly revenue is expected to grow 16% year-on-year, driven by the "new games breakout + old games stable + overseas acceleration." The new game "Triangle Action" is performing strongly with estimated quarterly flow reaching 6.5 billion yuan, daily active mobile users exceeding 25 million, and PC maintaining second place in internet café popularity, thanks to the deep empowerment of the hybrid AI Game model in NPC decision-making and scene generation. "Honor of Kings" and "Peace Elite" have seen approximately a 15% improvement in user retention rates through AI dynamic task generation, steadily contributing stable income. Overseas market growth is expected to maintain above 30%, with AI localization optimization for "PUBG Mobile" and operational upgrades of Supercell games continuing to unleash growth potential.

Ad revenue growth is expected to rise to 19%, further highlighting the synergy between Video Accounts and AI technology. The ad loading rate in Video Accounts has risen from low single digits to mid-single digits, with quarterly ad revenue exceeding 10 billion yuan, and live-streaming and mini-program redirection ads forming a "content-conversion" closed loop, with merchants' willingness to invest consistently strengthening. AI technology achieves full-chain optimization, with the "Intelligent AI Creative" feature able to automatically generate personalized materials, improving ad conversion rates by over 20%, complemented by the release of inventory from WeChat Search AI ads (the third largest AI search entry domestically), becoming a new growth pole.

Financial Technology and Enterprise Services are expected to grow 11%. Financial technology benefits from the growth of transaction amounts in mini-program commercial payments and mass expansion of e-commerce commissions, with profitability consistently improving; enterprise services (Tencent Cloud) hit an AI turning point, with surging demand for GPU leasing and API tokens, quarterly revenue is projected to grow 14% year-on-year, significantly higher than the 8% growth rate in the first half.

2. Balance Between AI Commercialization and Profit Quality

The ability of AI technology to achieve large-scale monetization and changes in profit margins is crucial in measuring strategic value. In revenue conversion, the performance of AI applications to the To-C endpoint is stable; "Tencent Yuanbao" monthly active users grew 23.6% quarter-on-quarter from 25.025 million to 30.921 million, and another AI application "ima" ranks among the industry's leaders, showcasing the advantage of ecological flow conversion; on the To-B side, the hybrid AI model's open-source strategy has attracted numerous game developers and corporate clients, with the proportion of AI-related service revenues continually rising.

Regarding profit margins, the market is focused on the conflict between the rising proportion of high-margin businesses and the costs of tech investment. Goldman Sachs predicts a 18% year-on-year growth in non-GAAP earnings per share for the third quarter, significantly higher than the 13% revenue growth rate, primarily benefiting from the growth of high-margin businesses like advertising and gaming and the release of operational leverage. However, pressure from capital expenditures still exists, as Goldman Sachs has raised capital expenditure estimates for 2025-27 to 350 billion yuan, focusing on chip procurement and AI reasoning scenarios, potentially suppressing profit growth in the short term but supporting the monetization of computing power services in the long term.

3. Strategic Implementation and External Environment Adaptability

This quarter serves as a crucial window to test the results of TENCENT's long-term strategic implementation. In AI ecosystem layout, Hyun Picture 3.0 has topped the global text-to-image rankings, with its multi-modal capabilities penetrating scenarios like advertising, gaming, and finance; whether its technological lead can be transformed into market share becomes an important focus. In the local life field, the "Store Pass" internal test in July has attracted over 100,000 merchant registrations; whether its precise marketing model can close the gap with industry leaders will open up new space for advertising business.

Regarding the external environment, the alleviation of anti-monopoly pressure provides favorable conditions for business development, though industry competition still needs attention. The domestic game market lacks a phenomenal new work to take over in the third quarter; whether TENCENT can consolidate market share with products like "Triangle Action"; in AI application fields, where big companies like ByteDance and Ant are accelerating layouts, whether products like "Tencent Yuanbao" can maintain growth momentum also potentially affects short-term performance expectations.

III. Latest Views from Wall Street Investment Banks: AI-Driven Valuation Reshaping, Full Long-Term Confidence

As of late October 2025, mainstream Wall Street investment banks have intensively released research reports, maintaining positive ratings on TENCENT, generally believing AI technology breakthroughs will drive valuation reshaping, with current valuations still having a safe margin, and target prices ranging between HKD 700-770.

Regarding ratings and target prices, institutional attitudes are highly consistent. Goldman Sachs maintains a "Buy" rating, raising the target price from HKD 701 to HKD 770, with the current share price of HKD 651.5 implying an 18.2% upside potential; its core logic is valuation enhancement driven by breakthroughs in AI models and multi-business monetization. Morgan Stanley reiterates its "Overweight" rating, gives a target price of HKD 700, listing TENCENT as the top choice in Hong Kong stocks, expecting a non-GAAP operating profit growth of 18% year-on-year in Q3, emphasizing the company possesses the core advantages of "robust growth + efficient operations + reasonable capital management." Other mainstream institutions' target prices also concentrate in the HKD 700-750 range, reflecting broad approval of growth logic.

Investment banks have formed three consensuses from core logic judgment. First, AI is the core catalyst for valuation reshaping. Goldman Sachs pointed out the hybrid AI model's technological breakthrough has reached global top levels, To-C and To-B endpoint application implementation is accelerating, with every 1 yuan AI capital expenditure capable of converting 0.1-0.2 yuan cloud revenue; cloud business is expected to achieve 30% growth in 2026. Morgan Stanley also believes AI has fully demonstrated empowerment effects on gaming and advertising, becoming the "core engine" of business growth.

Secondly, business structure optimization enhances profit resilience. Investment banks generally favor the developmental path of "gaming globalization, advertising AI transformation, cloud business computing power transformation," with Goldman Sachs estimating through divisional valuation that gaming, advertising, fintech, and cloud business contribute 40%, 25%, 17%, and 6% of EPS respectively, highlighting significant synergy effects of core businesses.

Thirdly, valuation has a safe margin. Currently, TENCENT's non-GAAP PE ratio for 2025 stands at approximately 16-17 times, expected to be 19 times in 2026 (16 times after excluding investment portfolio), considerably lower than Meta (24 times) and Google (23 times), with stable shareholder return policies being an important basis favored by institutions.

Overall, Wall Street holds an optimistic expectation of TENCENT's third-quarter performance, believing AI-driven growth logic has been validated, short-term performance fluctuations do not affect long-term value, and the competitiveness improvement brought by technology investment and business expansion will continue to support valuation upward.