In August, internet giants Tencent and Alibaba emerged triumphant.
Their earnings results satisfied investors, driving significant stock gains. AI business became a new growth engine for both companies' performance. From AI infrastructure to large language models, cloud services, and application software, both sides invested heavily in AI and reaped returns.
The latest earnings from Tencent and Alibaba show that both companies are not just investing in AI and restructuring their business ecosystems with AI, but are also presenting a strong stance of "securing their AI entry tickets."
Although it remains difficult to accurately quantify AI-generated revenue, investors still cast their confidence votes.
After releasing earnings, Tencent's stock reached HK$600 per share during trading on the first post-earnings day (August 14) in Hong Kong, hitting a nearly four-year high with year-to-date gains exceeding 41%. Following Alibaba's first quarter fiscal 2026 earnings announcement (ending June 2025), despite profit declines and revenue performance falling short of market expectations causing brief pre-market declines in US trading (August 29), the stock quickly rebounded and surged throughout the day, ultimately closing up nearly 13%, marking its best single-day performance since March 2023, with stock price nearly doubling year-to-date.
The latest earnings from Tencent and Alibaba opened not only their respective performance scorecards, but also served as a battlefield report on their AI arms race.
This AI arms race status report shows that Tencent and Alibaba have unhesitatingly bet on AI's future, setting no limits for themselves in this costly competition.
**AI: New Growth Engine**
From second quarter performance, AI is no longer just a concept in both companies' earnings reports, but a substantial force driving growth. Both companies have found effective paths to convert AI into revenue, albeit through completely different models.
Tencent's AI story doesn't focus on single department growth, but positions AI as an efficiency "lubricant," comprehensively empowering existing businesses centered on gaming and advertising, creating more stable growth.
The most significant example is its marketing services (advertising) revenue surging 20% year-over-year. Tencent explicitly stated in earnings that this benefited from "AI-driven advertising platform optimization." AI is used for ad creation, placement, recommendations, and performance analysis, improving click-through rates, conversion rates, and advertiser investment, significantly enhancing advertiser ROI. This made Tencent's massive social traffic more valuable than ever, driving advertiser demand for Video Accounts, Mini Programs, and WeChat Search.
Gaming, as Tencent's pillar business, maintained over 20% growth for the third consecutive quarter. Its evergreen games like "Honor of Kings" and "PUBG Mobile" further evolved into platforms while increasing AI application intensity.
Tencent is widely deploying AI tools to accelerate game content production, create more realistic virtual characters, and employ AI-driven marketing to attract new players and enhance engagement. This directly improved development efficiency and user experience while boosting gaming revenue growth.
Notably, Tencent proactively disclosed in earnings that GPU leasing and API token calls drove enterprise services revenue growth recovery—such granular disclosure was uncommon previously.
As Pony Ma stated, Tencent "continues investing in AI and benefiting from it." Its greatest opportunity lies in AI permeating like a catalyst across all business lines, making each segment operate more efficiently with stronger profitability.
In contrast, Alibaba's earnings showed that Cloud Intelligence Group achieved quarterly revenue of RMB 33.398 billion, with growth accelerating to 26%, hitting a three-year high, primarily driven by accelerated public cloud business revenue growth. AI-related product adoption increased, with related revenue maintaining triple-digit growth for eight consecutive quarters. Second quarter AI-related product revenue already accounts for over 20% of Alibaba Cloud's external commercial revenue.
During the earnings call, Alibaba Group CEO and Cloud Intelligence Group CEO Eddie Wu stated that on one hand, enterprise demand for AI-related products remains strong, including training and inference needs. On the other hand, compared to traditional cloud computing, AI will help increase cloud market concentration, as AI technology requires developers to use much more complex technology stacks when developing applications, driving them to choose vendors with comprehensive technical product portfolios. Alibaba Cloud has leading advantages in big data, databases, AI technology stacks, computing power, model capabilities, and open-source ecosystems.
Meanwhile, Alibaba's consumer-facing applications achieved multiple AI advancements: AutoNavi maps became fully AI-powered, DingTalk completed AI upgrades, and Taobao platform realized AI search and AI advertising platform upgrades, improving consumer experience and merchant operational efficiency.
However, unlike the direct forms of B2B businesses like Alibaba Cloud and Tencent Cloud renting AI servers and selling AI software and services to enterprises, how AI-powered consumer applications and native AI applications (Tencent Yuanbao, Alibaba Tongyi, etc.) monetize and generate revenue remains unclear.
Currently, both sides have different investments in consumer applications. In Q1, Tencent heavily invested in user acquisition for native AI application Yuanbao, with monthly active users once exceeding 40 million. However, Tencent slowed its aggressive user acquisition pace for Yuanbao in Q2. According to QuestMobile's "AI Application Market Semi-Annual Report" released August 5, Tencent Yuanbao reached 24.805 million monthly active users in June, with a compound growth rate of 55%. Alibaba's native AI application Tongyi has relatively smaller monthly active scale, approximately 1-5 million range, with minimal market promotion observed.
**Heavy Burden and Challenges of Embracing AI Future**
While AI opportunity windows opened for both companies, entry tickets are extremely expensive, and earnings reports openly exposed the enormous challenges of this arms race.
For years, Alibaba led in revenue through e-commerce scale but consistently lagged Tencent in profitability, with this gap widening further this quarter.
This quarter, Alibaba achieved net profit of RMB 33.51 billion, down 18% year-over-year. The reason is Alibaba's AI investment remains at high levels, while amid the ongoing "food delivery war," Alibaba increased investment in instant retail (including food delivery business) in Q2. This dual-front warfare in AI investment and e-commerce competition doubled financial pressure.
The core cost reflects in free cash flow. In Q2, Alibaba's net free cash flow plummeted from RMB 17.4 billion in the same period last year to a net outflow of RMB 18.8 billion. This means Alibaba's cash consumption far exceeded operational cash flow to support AI infrastructure construction and competition in instant e-commerce, entering large-scale "cash burning" phase.
To provide ammunition for long-term development of AI and cloud business while competing with Meituan and JD.com in instant retail, Alibaba chose to sacrifice short-term profits, behind which are costly subsidies and price wars. Particularly in instant retail, Goldman Sachs estimates Alibaba's food delivery business alone lost RMB 11 billion in the quarter ending June, predicting instant retail losses expanding to RMB 31 billion in the current quarter ending September.
Alibaba is essentially using profits and cash reserves to buy an entry ticket to the "AI+Cloud" era while fighting another commercial war.
However, from cash flow perspective, Alibaba has sufficient cash reserves, with Q2 operating cash flow of RMB 20.672 billion and cash and other liquid investments of RMB 585.663 billion.
During the earnings call, Eddie Wu emphasized that the technology platform centered on AI+Cloud and the large consumption platform integrating shopping and lifestyle services are Alibaba's two historic opportunities, requiring saturated investment. Previously, during DeepSeek's popularity in the first half, Wu announced a three-year plan to invest RMB 380 billion combined in AI and cloud.
Regarding "food delivery war" investment and results, CICC believes Alibaba gained initiative in this competition, evolving from a marginal second-place role in the food delivery industry to a dominant force determining industry progress. "In the first stage of competition, Alibaba persists with saturated investment without considering short-term profits, causing industry-wide profitability to be quickly eroded. In the second stage, Alibaba focuses on efficiency optimization as core goal, expecting the industry to have strong motivation to follow."
In comparison, excluding investment income impact, Tencent's Non-IFRS net profit attributable to shareholders reached RMB 63.052 billion, up 10% year-over-year, with profit growth accelerating from the previous quarter.
Despite high profits, Tencent is also creating record-breaking capital expenditure. In Q2, capital expenditure including IT infrastructure and data centers surged 119% year-over-year to RMB 19.1 billion. Tencent explicitly stated this massive expenditure primarily supports AI-related business, particularly GPU and server procurement. However, Tencent indicated no change to full-year capital expenditure targets.
While Tencent's capital expenditure is enormous, holding WeChat traffic ecosystem, its strong gaming+advertising core business generates abundant cash flow sufficient to cover these expenses. Its challenges lie more in ensuring high investment brings high returns and managing external supply chain risks.
Actually, in advancing AI strategy, Tencent pays not only monetary costs but also bears potential strategic costs of supply chain risks. Market research company Canalys reported that GPU supply constraints affected Tencent Cloud growth. This means Tencent's AI strategy advancement speed is largely constrained by external advanced chip (mainly NVIDIA AI chips) supply, representing a significant hidden cost amid geopolitical uncertainties.
Regarding chips, Tencent President Martin Lau stated Tencent has sufficient chip reserves for model training and upgrades. "We also have many choices in inference chips, and we're making extensive software improvements and upgrades to enhance inference efficiency, enabling more workload allocation on the same number of chips."
Besides multi-party cooperation, Alibaba has early positioning in self-developed chips, potentially providing more flexibility. Eddie Wu indicated that regarding policy changes around AI chips, backup plans have been formulated, cooperating with various partners and adapting to different supply chain solutions. Reports suggest Alibaba has launched self-developed AI inference chips.
Comprehensively, during Alibaba's saturated investment in technology platforms centered on AI+Cloud and large consumption platforms integrating shopping and lifestyle services, cash flow and profits—two core financial health indicators—were directly impacted.
This is a high-risk strategic transformation with everything at stake. However, Alibaba's stable e-commerce foundation and leading position in AI and cloud business remain its confidence sources.
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