Tencent profit misses forecasts as AI costs weigh on earnings

Tencent Holdings reported on Wednesday a fiscal first-quarter profit that missed analyst estimates as heavy spending on artificial intelligence and other emerging technologies weighed on margins, despite an 11% rise in revenue.

Net profit attributable to shareholders fell 11% from a year earlier to 23.1 billion yuan ($3.2 billion), according to a company filing. This missed the average estimate of 27.1 billion yuan among analysts surveyed by Refinitiv, reflecting a broader squeeze on profitability as the company ramps up investments in AI infrastructure, cloud services and content creation tools.

Revenue totaled 155.1 billion yuan, up 11% year-over-year, driven by growth in online advertising, fintech and cloud computing. Advertising revenue rose 15% to 30.8 billion yuan, while fintech and business services, which includes cloud, climbed 12% to 54.1 billion yuan. The cloud segment, a key focus for Tencent’s AI strategy, grew 24% to 28.2 billion yuan.

Operating expenses surged 23% to 104.8 billion yuan, with research and development costs rising 30% to 16.1 billion yuan. The company attributed the increase to investments in AI models, data centers and talent acquisition, as it competes with peers such as Alibaba and ByteDance in the high-stakes AI market.

Tencent’s chief financial officer, John Lo, said in a statement that while AI spending is expected to continue pressuring margins in the near term, the investments are critical for long-term growth. "We remain committed to strategic areas like AI, cloud and fintech, which are foundational to our future competitiveness," Lo said.

The company did not provide a formal outlook but indicated that AI-related capital expenditures would remain elevated through at least the next two quarters as it scales up infrastructure and talent. Analysts at Citi noted that while the revenue growth was solid, the margin compression was a concern, particularly as competitors also accelerate their AI initiatives.

Tencent’s shares were down 2.1% in Hong Kong trading on Wednesday, underperforming the broader tech sector amid investor concerns over rising costs and near-term profitability.