By Sherry Qin
Tencent Holdings reported mostly in-line results in the first quarter as its core businesses stayed resilient to cushion ballooning investments to stay ahead in China's artificial-intelligence race.
The WeChat operator, China's largest company by market capitalization, is accelerating its AI efforts amid a recent strategy shift. Tencent was previously focused on leveraging the technology to boost productivity and reduce costs across various businesses. Now, it is more than doubling its AI investment after spending the equivalent of about $2.65 billion last year.
The company is trying to play catch-up as its foundation model, Hy, lags behind others by Chinese rivals like ByteDance and Alibaba. Analysts think its ample cash position, strong cash-generative gaming business, and the dominant WeChat ecosystem should help narrow the AI gap with peers.
The videogame and social-media company on Wednesday said first-quarter net profit rose 21% from a year earlier to 58.09 billion yuan, equivalent to $8.55 billion, beating market expectations.
Growth in adjusted net profit slowed to 11%, from 17% in the final quarter of 2025. Tencent's management said non-IFRS financial measures provide investors with useful supplementary information to assess the performance of the company's core operations by excluding certain items.
Shares of China's most valuable company have lost steam this year as its aggressive capital spending plan stokes concerns about an earnings slowdown following quarters of double-digit growth in both profit and revenue. The Hong Kong-listed stock ended 1.2% higher on Wednesday ahead of the results but losses this year have totaled more than 20%.
The latest earnings have started to reflect the burden of heavier AI investment. Tencent's adjusted operating profit increased 9%, though that growth jumps to 17% when excluding new AI products such as Hy, Yuanbao and WorkBuddy.
Citi analysts think the numbers were in line, "demonstrating decent operating leverage from existing core business."
Tencent has moved quickly since forming a new AI division and hiring top industry talent. The company last month released a preview of its latest large language model, Hy3, claiming a 40% improvement in inference efficiency with competitive pricing.
It is also betting on agentic AI as the competitive landscape shifts from developing foundational models to building autonomous AI agents that can act, plan and execute multistep workflows--all without human intervention.
Tencent has unveiled a series of OpenClaw-like AI agent tools, seeking to capitalize on the hype and secure leadership in this new space. Chairman Pony Ma in March highlighted OpenClaw's flexibility and efficiency, saying that the agentic AI assistant allows Tencent to leverage its ecosystem strength to compete on multiple fronts.
The company claimed that its AI agent tool WorkBuddy is currently the most widely used productivity AI agent service in China.
Revenue climbed 9% to 196.46 billion yuan, missing analysts' expectations of 199.03 billion yuan, mostly weighed by weaker gaming revenue. Its revenue from domestic games rose a modest 6% in the first three months of 2026, as the timing of the Lunar New Year this year affected revenue recognition for the quarter.
Morningstar analyst Ivan Su thinks Tencent's weaker gaming revenue was mostly driven by the timing shift rather than any underlying demand problem.
Marketing services were a bright spot for the quarter, with revenue climbing 20% after Tencent upgraded its AI-driven ad recommendation model.
Write to Sherry Qin at sherry.qin@wsj.com
(END) Dow Jones Newswires
05-13-26 0651ET
