Summary of Key Points
Tencent’s stock price has been experiencing significant volatility recently: it plummeted by 7% on July 22nd before turning higher the following day, with its market value hovering around HK$4 trillion. The main concerns in the market stem from two aspects—declining game revenue and uncertain returns on AI investments. However, investment banks (Citi and Bernstein) believe these worries are exaggerated: Tencent’s gaming business remains strong, AI costs are not indefinitely costly, and the company has made tangible progress with AI initiatives such as WorkBuddy (an intelligent office assistant) and WeChat Mini Programs. Nevertheless, AI monetization is still in its early stages, and Tencent needs to make long-term strategic investments.
The Three Major Sources of Concern Leading to the Stock Price Drop
The sharp drop in Tencent’s stock price on July 22nd was due to a combination of three market concerns:
1. Fears of declining game revenue: Global mobile gaming spending decreased by 7% month-over-month in June, and Tencent’s second-quarter profits were $900 million lower year-on-year, leading to concerns that its gaming business would suffer similarly.
2. Concerns about the high cost of AI investments: There are fears that Tencent is investing too much in AI, which could drag down short-term profits.
3. Shift in investor interest: Funds are flowing towards AI hardware companies (such as chip manufacturers), temporarily neglecting software companies like Tencent.
These factors combined to amplify negative sentiment and cause the stock price to plummet.
Investment Banks Debunk Concerns: Gaming Business Is Not As Bad as It Sounds, and AI Costs Are Overestimated
Citi and Bernstein have tried to calm market fears:
- Citi argues that game revenue figures are misunderstood: Money spent by players is not immediately recognized as revenue (for example, if a player buys a skin but does not use it, the revenue is only recorded when it is used). Additionally, PC games performed well, and Citi predicts that Tencent’s domestic game revenue will increase by 8% year-on-year in the second quarter (although it decreased by 3.9% month-over-month, which is within normal fluctuations).
- Bernstein believes AI costs are overly pessimistic: The claim that AI requires unlimited subsidies is incorrect; Tencent’s Hy3 model has made significant improvements compared to the April version, and feedback from the beta test of WeChat Mini Programs indicates that costs are manageable.
Tencent’s Progress with AI
Tencent has been active in AI this year:
- WorkBuddy becomes a leader in office AI: In the second quarter, WorkBuddy ranked first among desktop AI assistants with over 20 million visits in June, and it now has its own standalone app.
- WeChat Mini Programs are in testing: Some users have already started using the AI assistant, but with over 1 billion WeChat users, full-scale deployment would incur high computational costs (AI requires substantial resources, meaning more expenses as the user base grows).
Ma Huateng’s View on AI: “The Ship Is Accelerating, but Don’t Rush to Monetize”
Ma Huateng responded to doubts about Tencent’s AI progress by using a metaphor: “A year ago, we thought we were on the ship; later, we found it was leaking. Now we’re on board, but we can’t sit down yet—we hope the ship will speed up.” This indicates that AI is still being improved and has not reached maturity.
Executives also emphasize that AI monetization is still in its early stages, and even leading companies have not yet found a successful model. Besides subscription-based models (where users pay for AI services), other revenue sources need to be explored, with a long-term perspective.
The Solid Foundation of Tencent’s Gaming Business
Gaming remains a key pillar for Tencent:
- First-quarter performance: Local game revenue was HK$45.4 billion (up 6% year-on-year), and international game revenue was HK$18.8 billion (up 13%).
- Second-quarter forecast: Citi expects local game revenue to increase by 8% year-on-year, although there may be a slight decrease month-over-month. More detailed information will be available in Tencent’s second-quarter financial report on August 12th.
In summary, Tencent’s core gaming business is stable, while its new AI initiatives are still developing. The stock price fluctuations reflect short-term market sentiment, but the long-term success of Tencent’s AI efforts will depend on its ability to generate actual revenue.