Alibaba and Tencent recently reported earnings. I haven't had time to analyze these two companies' financials until now. As the bellwethers of popular ETFs like Hang Seng Tech, Hang Seng Internet, Hong Kong Stock Connect China Tech, Hong Kong Stock Connect Internet, and China Internet, studying their results provides valuable guidance for investing in these funds.
1. The "False Prosperity" of Financial Data and the Fading Moat of Buybacks
On the surface, Tencent's 2025 revenue grew 14% year-over-year, and non-IFRS operating profit rose 18%—solid in the current macro environment. Yet the market punished the stock with a sharp decline. The core pain point: the weakening of the "dividend narrative." In 2025, Tencent spent about HKD 80 billion to repurchase 153 million shares. This aggressive share cancellation was the key driver supporting the stock over the past year.
But in the latest earnings call, management signaled a dangerous shift: to increase AI investment, 2026 buybacks may be lower than 2025. For institutional investors who have long treated Tencent as a "high-dividend/high-buyback" safe haven, this pivot from "returning cash to shareholders" to "burning cash on R&D" triggered a stampede out of the stock post-earnings.
2. AI Investment: "Boiling the Frog"—Ambition vs. Scale
Tencent touted its increased AI investment in the earnings report, showcasing products like Hunyuan 3.0, Yuanbao, and WorkBuddy. However, a closer look at its capital expenditure reveals that while CapEx grew in 2025, it remains extremely modest compared to ByteDance or global giants.
Tencent plans to invest about RMB 36 billion in AI products in 2026—not a huge sum in the AI world. Compared to Microsoft and Google's quarterly CapEx of over $10 billion each, Tencent's spending looks more like "patching up" existing businesses than "betting big" on new frontiers. This middle-ground approach—trying to maintain profits while chasing technology—leaves the market worried that Tencent will end up "early to rise, late to the party" in the foundational model race.
3. Tencent Cloud Losing Steam: A Growth Engine on the Sidelines
The earnings report mentioned that the cloud business achieved scale profitability, but from a growth rate perspective, Tencent Cloud is under unprecedented pressure. Globally, Google Cloud and Microsoft Azure continue to grow at 30%-40%. Domestically, Alibaba Cloud grew 36% in the quarter.
In comparison, Tencent Cloud's growth rate lags significantly behind the first tier. Its business structure remains deeply tied to the social and gaming ecosystem, lacking aggression in expanding into external government/enterprise markets and AI compute leasing (MaaS). This growth weakness reflects Tencent's "asset-light" DNA hitting a bottleneck in the AI-heavy-asset era.
Alibaba: The Big Stumble—"Selling at a Loss for Applause"
1. Core Business Bleeding and the Shattered Profit Myth
Alibaba's earnings can only be described as "brutal." Group revenue growth slowed to 2%, marking the company's complete transition from a growth stock to a low-growth mature enterprise. Taobao and Tmall Group (TTG), squeezed between Pinduoduo and Douyin, saw GMV and profit growth nearly stall, with core commerce profitability eroding.
More seriously, net profit attributable to shareholders plunged over 60% year-over-year. While this includes investment impairment charges, the ongoing compression of core business margins is undeniable. Alibaba is trapped in a dangerous cycle: the core business is bleeding while new ventures burn cash. This is the fundamental reason behind the stock's collapse.
2. Alibaba Cloud's Passing Grade: Profit Anxiety Amid High Growth
Alibaba Cloud's revenue grew 36% in the quarter, seemingly impressive, but it's a defensive battle to "maintain scale." AI-related products have seen triple-digit growth for ten consecutive quarters, largely driven by aggressive price cuts and heavy subsidies for the MaaS ecosystem.
Although the Qwen large model surpassed 300 million MAU across all endpoints, this "passing grade" comes with extremely high customer acquisition costs. In the B2B market, Alibaba has a lead in finance and manufacturing, but with Huawei, Tencent, and telecom clouds entering the fray, Alibaba must sacrifice margins to maintain market share. The "revenue growth without profit growth" situation has not fundamentally improved.
3. The Marketing Black Hole: AI Red Packets and Delivery-Style Promotion Futility
Alibaba launched an "AI Red Packet War" in early 2026, using traditional internet-era tactics like subsidies and giveaways to promote its large model. While this temporarily boosted app downloads and DAU, AI tools differ from social media or food delivery—they require high user stickiness and productivity conversion.
This "selling at a loss for applause" behavior attracts a flood of low-quality users. Once subsidies stop, retention is questionable. For Alibaba, this expensive traffic-buying not only burns cash but also reveals its anxiety over lacking native AI application scenarios.
Future Breakthrough: Heavy Asset Game and Market Share Battle
1. Tencent's Path: From Defense to Offense
Tencent's opportunity lies not in burning cash on compute, but in its ubiquitous WeChat ecosystem. If Tencent can deeply embed the Hunyuan model into Video Accounts, WeChat Search, and office assistants, fundamentally improving ad conversion rates, its steady financials could regain market premium.
2. Alibaba's Path: Stop the Bleeding and Rebuild Core Competitiveness
Alibaba's most urgent need is to stabilize Taobao and Tmall. For Alibaba, AI should not just be a cloud business increment but a foundational tool to restructure e-commerce search and recommendation logic. Only when AI significantly reduces merchant costs and improves consumer experience can Alibaba escape the "subsidies for growth" quagmire.
3. The Common Question: Why Did Both Stocks Drop 7%?
The simultaneous 7%+ drops in both giants' stocks reflect a market repricing of the "China internet AI narrative." Investors are no longer satisfied with impressive MAU numbers or verbal commitments. They are scrutinizing who can truly convert AI into cash flow and who can deliver explosive performance after reducing buybacks. Tencent must overcome its "big ship hard to turn" inertia and invest real money to build a moat. Alibaba must end the "selling at a loss for applause" illusion and return to business fundamentals. The battle for the future has just begun.
Risk Disclaimer: This content is for informational purposes only and does not constitute investment advice. Market risk exists; invest wisely.
