Tencent shares slide as Mizuho cuts price target on AI returns concerns

On Tuesday, Tencent shares experienced a decline of 1.8%, sliding to HK$438.40, as Mizuho lowered its price target amidst concerns over the company's ability to generate substantial returns from its burgeoning AI investments. Despite Mizuho maintaining a Neutral rating, the brokerage noted that the path to improved returns from Tencent's expanding AI spending has become less clear-cut.

The tech giant's core businesses displayed resilience, with total revenue growing by 11% year-on-year, slightly surpassing analysts' expectations. However, operating income fell short of projections, primarily due to increased AI expenditure, although operating margin still expanded by 30 basis points year-on-year. One significant concern for investors is that Tencent's free cash flow turned negative during the quarter, as capital expenditure surged to a record RMB52.8 billion, reflecting the costs associated with its AI ventures.

Advertising proved to be a bright spot, with revenue surging 22% year-on-year. Cloud services also showed strong growth, accelerating to the low-20% range in the latest quarter compared to the previous quarter's high-teens growth. Mizuho highlighted the progress of Tencent's in-house AI models, with HY3 ranking among the top three globally on OpenRouter by token usage.

Nevertheless, the brokerage cautioned that Tencent currently does not lead in two key AI applications that demonstrate the most promising potential for subscription monetization globally: coding assistants and AI-native video. Additionally, Mizuho pointed to pressure in international gaming, which had its first year-on-year decline since early 2022.

The brokerage anticipates that Tencent's AI investment cycle will persist, with several products to watch, including a new generation large language model, a text-to-video model, CodeBuddy for enterprise users, and Xiaowei's integration into WeChat.

While the brokerage held fiscal 2026 and 2027 estimates unchanged, it reduced valuation assumptions, citing recent weakness across the broader AI sector.