Tencent significantly increases capital expenditure for AI, and big fish hide beneath the waves.

Text by | Wang Yuchan

Edited by | Qiao Qian

In the fourth quarter of last year, Tencent Group achieved double - digit revenue growth again after a whole year, with a growth rate of 11% and revenue of 172.45 billion yuan, exceeding market expectations. Meanwhile, the gross profit reached a record high of 90.65 billion yuan, a year - on - year increase of 16.9%, and the gross profit margin was 52.6%.

The revenue growth is mainly attributed to the upgrade of the AI - empowered advertising platform, the increased user engagement on Video Accounts, and the growth of long - standing games. The growth of gross profit is mainly due to the growth of high - gross - margin revenue sources such as domestic market games, Video Accounts, and WeChat Search, as well as the improved cost - effectiveness of cloud services.

Since the confidence in the advertising market has not fully recovered, the capital market did not have high expectations for Tencent's advertising business in Q4. However, the marketing services business ultimately achieved an unexpected 17% growth. Tencent stated that advertising spending in most key industries increased this quarter. The driving forces behind this are AI and Video Accounts.

The game business, especially the domestic game business, performed excellently. The revenue from domestic market games increased by 23% year - on - year, and the business has not seen growth of over 20% for many years. Naturally, this is affected by the low base in the same period last year. At the same time, major games such as Honor of Kings, Peacekeeper Elite, and VALORANT also contributed to the revenue growth, as did the recently released games Dungeon & Fighter: Origins and Delta Force.

However, the performance of the business itself is not the focus of everyone's attention. What did people care about most this quarter? Undoubtedly, it's AI. At the earnings conference call, almost all analysts' questions were related to AI. As an internet giant that controls content production, social relationships, and AI R & D, the outside world is eager to know how Tencent will integrate AI with its existing businesses and whether it's time to re - evaluate Tencent.

However, AI not only brings future benefits but also immediate expenses. This quarter, Tencent achieved a GAAP core operating profit of 49 billion yuan, lower than market expectations, which is closely related to the soaring R & D expenses. This quarter, server costs increased by 37% year - on - year, and R & D personnel salaries increased by 15% year - on - year. AI requires spending money before it can make money.

AI, Changing Everything

Several months ago, Tencent reorganized its AI team to focus on rapid product innovation and in - depth model R & D, increased capital expenditure related to AI, and stepped up the R & D and marketing of native AI products.

Tencent's Chief Strategy Officer James Mitchell said that the bulk of capital expenditure consists of three parts: first, purchasing GPUs to support advertising technology, with a small portion for the game business; second, using GPUs for large - language model training; and finally, buying GPU servers and renting them to customers to earn returns.

"Among all listed companies, I believe our capital expenditure in the fourth quarter of last year was the highest among Chinese technology companies, so we are in the leading position among domestic peers," James Mitchell said. "Generally speaking, the proportion of capital expenditure to revenue of Chinese technology companies is lower than that of some Western peers. But we've always believed that this is because Chinese companies generally pay more attention to efficiency and the efficient use of GPU servers, and this doesn't necessarily affect the final results of the technologies being developed. I think the success of Deepseek is, to some extent, a symbol and fully proves this fact."

The benefits brought by AI are currently mainly reflected in the advertising and game businesses. Referring to the US internet giant Meta, after significantly increasing AI capital expenditure, its AI - driven advertising business has continued to grow, and its stock price performance has outperformed other technology giants. AI also contributed to Tencent's unexpected growth in the advertising business this quarter.

"The AI technology we've deployed has brought better return on investment for advertisers than before and better than what other channels can offer. It's reasonable to compare us with some global peers," James Mitchell said. However, Tencent prefers to "gradually and slightly" increase the advertising volume for new products like short - videos and won't be reckless.

In the game business, Tencent President Martin Lau said, "AI can make long - standing games even more long - standing." In the game production process, Tencent can already use AI to create high - quality content in a short time and update games with high - quality content more frequently.

"In the player - versus - environment (PVE) experience, when there are more intelligent programs in the game, the game becomes more exciting and closer to the player - versus - player (PVP) experience. In the PVP mode, after applying artificial intelligence, tasks such as player matching, balance adjustment, and novice guidance can be done better. All these actually help popular large - scale games further increase their popularity and are more attractive to players," Martin Lau said.

Moreover, Tencent believes that the game industry can indirectly benefit from the progress of AI. When AI helps people save time on work and decision - making, they will have more leisure time to play games. Although this indirect benefit may not be realized until several decades in the future.

Regarding the integration of AI agents with WeChat's social business, Martin Lau said that in addition to Tencent Yuanbao, Tencent can also deploy artificial intelligence agents within WeChat and QQ.

"Many people conduct various types of work on WeChat, many people study on WeChat, and a large number of transactions are completed through WeChat. There are also numerous mini - programs, which enable various activities to be carried out. We can easily build an agent based on the model and connect it to many different mini - programs to complete various activities and complex tasks for users," Martin Lau said.

Recently, there were rumors on social media that "WeChat is brewing an AI Agent similar to Meta AI and will launch it as a function within WeChat," but the rumor has been proven false. As a super - app with a user base close to the total population of China, Tencent has always been very cautious about WeChat's function updates. Although users can already use DeepSeek on WeChat to assist with searches, the AI agents that will truly improve people's lives and work in the future will inevitably involve serious privacy issues, and this is not something that can be achieved overnight.

"Tencent hopes to provide users with a suitable experience while fully considering user data security and making them feel comfortable and at ease," Martin Lau said.

As a company that controls content production and social relationships, AI brings huge imagination to Tencent. However, at a time when the secondary market focuses more on short - term benefits, the increasing investment brought by AI will inevitably put pressure on the gross profit. Also, the improvement of Tencent's gross profit margin in the past few quarters comes from the expansion of high - gross - margin businesses in the revenue structure. In the future, when the comprehensive gross profit margin gradually approaches that of the incremental business, the improvement speed of the comprehensive gross profit margin will inevitably slow down. This is something that investors need to be vigilant about.

Looking at Each Business Segment, Tencent Remains Stable

Looking at each business segment, this quarter, Tencent's advertising business showed relatively positive growth signals; the game business was outstanding this quarter, but it may bring high - base pressure in the fourth quarter of this year; the financial technology and enterprise services business is still waiting for the macro - environment to improve; and the social network revenue was mediocre.

This quarter, Tencent's advertising performance was better than the industry average. In addition to the assistance of AI technology, Video Account advertising also contributed. According to the estimate of Dolphin Research by Changqiao, the revenue scale of Video Account advertising in the fourth quarter (mainly external circulation + e - commerce; the share of self - selected advertising is relatively low due to net revenue recognition) may have approached 8 billion yuan, a year - on - year increase of 50%, and it already accounts for 20% of the total advertising revenue.

In the game business, Tencent achieved high revenue growth with few new games, which proves the feasibility of the high - quality strategy. The earnings report mentioned that the number of Tencent's long - standing games increased from 12 in 2023 to 14 in 2024.

As mentioned above, the high base this quarter may lead to growth pressure on the game business in the fourth quarter of this year. Regarding this, James Mitchell added two points during the conference call to ease external concerns: first, the deferred revenue of Tencent's game business at the end of last year increased by more than 10% year - on - year. This deferred revenue will be gradually included in the reported revenue in the first and second half of 2025, and part of it will also be included in 2026; second, during this Spring Festival, the daily number of newly - added active users of Tencent's top five revenue - generating games all increased compared with the same period last Spring Festival.

In terms of financial technology and enterprise services, in commercial payments, the number of transactions increased this quarter, but the pressure on the average selling price (ASP) continued. So, from a value perspective, the overall performance remained dull. Martin Lau believes that this indicates that consumers' consumption propensity is actually recovering, but there is great pricing pressure on the supply side. "It shows that we are approaching the end of the market bottom."

As for the social business, although Tencent has ranked first in China in long - form video and music, the situation in the entire industry has not changed much. By the end of the year, the number of Tencent Video members reached 113 million, and the number of Tencent Music members increased to 121 million. Although the sales of mobile game virtual items and the service fees of mini - game platforms increased, part of the growth was offset by the decline in music live - streaming and game live - streaming services.