As AI spending soars, can China’s tech giants deliver long-term profits?

As US tech giants grapple with scrutiny over their burgeoning artificial intelligence budgets, their Chinese counterparts are facing a comparable challenge: demonstrating that hefty investments in AI infrastructure will generate lasting profits. The concerns surrounding "big tech" AI spending have intensified following Meta Platforms' Nasdaq-listed shares taking a 8% hit in after-hours trading amid a dip in free cash flow, despite beating revenue expectations.

Similar worries have also surfaced regarding Alphabet's negative quarterly free cash flow, driven by soaring AI expenditures.

Chinese tech leaders and frontier AI laboratories have embarked on a parallel race, pouring capital into the sector to keep pace with domestic rivals and US competitors. Yet, the focus is evolving from model performance to capital efficiency and return on investment. This shift became apparent in recent quarterly results from Alibaba Group Holding and Tencent Holdings, as their AI products started showing commercial viability.

Alibaba's cloud computing unit, a key driver of AI development within the e-commerce giant, reported a 38% year-on-year surge in revenue for the March quarter, with AI-related products accounting for nearly 9 billion yuan (US$1.3 billion) – an eleventh consecutive quarter of triple-digit growth.

Tencent's AI-driven recommendation and targeting engines have been bolstering advertising efficiency and pricing across its ecosystem, although the company has yet to disclose specific AI product revenue figures. According to HSBC analysts, the vast addressable market for enterprise AI presents a compelling growth opportunity. The total addressable market for enterprise AI is estimated at US$1.4 trillion globally and US$178 billion in China.

Morgan Stanley analysts remain bullish on hyperscalers, predicting that AI infrastructure rentals, model access, and AI-enabled services could generate attractive returns between 25% and 50%.