Tencent and Alibaba missed revenue estimates — so why did their shares rally?

• Tencent’s revenue miss was mainly due to Chinese New Year timing effects, while its core business remains highly profitable. Operating profit excluding new AI initiatives rose 17% year-on-year.

• Tencent’s AI initiatives, including Hunyuan 3.0, WorkBuddy, and CodeBuddy, helped drive 20% YoY advertising growth by improving ad targeting and monetisation efficiency.

• Alibaba’s headline weakness was distorted by divestitures and accounting changes.

• Alibaba is aggressively investing in AI infrastructure, cloud computing, AI agents, and quick commerce, resulting in weaker profits and negative free cash flow in the near term.

• Investors are increasingly rewarding companies that can demonstrate tangible AI monetisation and scalable cloud demand, signalling a shift in market valuation frameworks across China’s technology sector.

On 13 May 2026, the Hang Seng TECH Index staged a counter-intuitive rally. Despite both Tencent Holdings and Alibaba Group reporting quarterly revenues below consensus expectations, their US-listed shares surged. Tencent’s ADR rose 4.8%, while Alibaba’s ADS climbed around 8.3%.

The market reaction highlights a major shift in investor focus. Rather than penalising short-term revenue misses, investors are increasingly valuing companies based on their ability to monetise AI, scale cloud businesses, and strengthen long-term competitive positioning. In other words, the market is no longer asking only “Did revenue beat expectations this quarter?” — it is asking “Who is building the strongest AI ecosystem for the next five years?”

Tencent: Investors looked beyond the revenue miss

Tencent’s revenue came in around 1.3% below the market’s CNY 199 billion expectations (Table 1). However, the miss was largely driven by timing effects related to the Chinese New Year holiday. As the holiday fell later in 2026 compared with 2025, spending related to major games such as Honor of Kings and Peacekeeper Elite shifted into the second quarter. This delayed part of the seasonal in-app purchase cycle beyond the March quarter-end.

More importantly, Tencent’s international gaming business remained strong. Overseas gaming revenue rose 13% year-on-year, supported by titles such as Clash Royale, Wuthering Waves, and VALORANT. This suggests that Tencent’s core gaming franchises remain healthy despite temporary domestic seasonality.

Beneath the headline revenue miss, Tencent’s underlying business remains highly profitable. Operating profit excluding new AI initiatives rose 17% year-on-year to CNY 84.4 billion, while margins expanded from 39.9% to 43.0%. This provided reassurance that Tencent’s traditional businesses, gaming, social platforms, fintech, and advertising, continue to generate strong growth organically.

Table 1: Tencent’s FY1Q26 financial results

Metrics	1Q25 (Billion CNY)	1Q26 (Billion CNY)	YoY Change	Consensus
Total revenue	180.0	196.5	9%	Miss estimates of around CNY 199 billion
Value added services	92.1	96.1	4%
Marketing services	31.9	38.2	20%
FinTech and Business Services	54.9	59.9	9%
Others	1.1	2.3	103%
Gross Profit	100.3	111.3	11%
Non-IFRS operating profit	62.9	69.8	11%	Beat
Non-IFRS operating profit excl AI	72.1	84.4	17%	Beat
Non-IFRS operating margin excl AI	39.9%	43.0%	+310 bps
Non-IFRS net Profit	62.9	69.8	11%	Beat
Diluted EPS (IFRS)	5.1	6.3	23%	Beat
Source: Tencent’s earnings presentations. Data as of 31 March 2026.

AI is already improving monetisation

The strongest part of Tencent’s results was advertising. Marketing services revenue grew 20% year-on-year. The improvement was driven by upgrades to Tencent’s Hunyuan 3.0 large language model and the rollout of AI agents across the WeChat ecosystem. These include WorkBuddy which focuses on enterprise productivity and CodeBuddy which focuses on coding and software development. These AI tools improved advertisement targeting accuracy and click-through rates, helping advertisers achieve better returns on spending. Investors viewed this as direct evidence that Tencent’s AI investments are beginning to translate into real commercial returns.

On the model front, Hunyuan 3.0 has gained notable international traction as one of the most widely used models on the OpenRouter platform by token consumption following the end of its free trial on 8 May 2026. For a company that entered large-scale AI model competition as a relative latecomer, this marks a meaningful strategic milestone.

At the same time, Tencent is increasing AI investment. The management plans to spend more than CNY 36 billion on AI in 2026, double the CNY 18 billion invested in 2025. Tencent’s balance sheet remains exceptionally strong. Net cash of CNY 146.9 billion (up 63% year-on-year) and free cash flow of CNY 56.7 billion (up 20%) give the company full internal firepower for its AI ambitions without dilution or stress.

Alibaba: Weak earnings, but strong AI conviction

Alibaba’s results looked far more concerning than Tencent’s. Revenue missed expectations, while non-GAAP net profit declined nearly 100% (Table 2). However, investors quickly focused on the underlying drivers, and particularly on Alibaba’s accelerating AI and cloud momentum.

Table 2: Alibaba’s FY4Q26 financial earnings

Metrics	FY4Q25 (Billion CNY)	FY 4Q26 (Billion CNY)	YoY Change	Consensus
Total revenue	236.5	243.4	3%	Miss estimates of ~CNY 247 billion
China e-commerce group	115.3	122.2	6%
International Digital Commerce	33.6	35.4	6%
Cloud intelligence	30.1	41.6	38%
Others	83.3	65.5	-21%
Gross Profit	90.9	84.0	-8%
GAAP net income	12.0	23.5	96%	Beat
Non-GAAP net income	29.8	0.086	-100%	Deep miss
Non-GAAP diluted EPS	12.52	0.62	-95%	Deep miss
Source: Alibaba’s earnings presentations.  Data as of 31 March 2026.

Why the revenue missed: A divestiture distortion

Alibaba’s headline revenue miss was primarily caused by divestitures rather than deteriorating core demand. Businesses such as Sun Art and Intime, which contributed meaningfully to last year’s revenue base, were disposed during FY2026. Excluding these divested operations, Alibaba’s revenue would have grown roughly 11% year-on-year on a like-for-like basis.

Similarly, customer management revenue (CMR) growth appeared weak at only 1% YoY. However, this was distorted by an accounting change. Under Alibaba’s new merchant support programme, platform subsidies are now recorded as contra-revenue instead of marketing expenses. Adjusting for this reclassification, underlying CMR growth was closer to 8%.

Alibaba is sacrificing profits to build AI scale

The main reason profits weakened was aggressive investment spending. Total quarterly costs and expenses rose 17.5% year-on-year to CNY244.3 billion, far outpacing revenue growth. Two major investment areas drove this increase (Table 3):

• Quick Commerce expansion. Alibaba is investing heavily into Taobao Instant Commerce to compete in China’s rapidly growing quick-delivery market. China commerce adjusted EBITA fell 40% to CNY 24 billion as the company absorbed substantial subsidies and fulfilment costs. However, revenue from the segment surged 57% year-on-year to nearly CNY20 billion. Management also indicated that unit economics turned positive earlier in 2026, supported by improving order mix and higher-value categories. Losses are expected to narrow progressively through the second half of 2026.
• AI ecosystem buildout. Alibaba is also spending aggressively to scale the Qwen AI ecosystem. The “All Others” segment recorded adjusted EBITA losses of CNY 21.2 billion, compared with losses of CNY 3.4 billion a year earlier. The sharp deterioration mainly reflected higher user acquisition spending for the Qwen AI app and expansion of AI-related infrastructure. During the quarter, Alibaba integrated Taobao and Tmall into Qwen, creating an AI-native shopping experience.

Table 3: Alibaba’s FY4Q26 adjusted EBITA by segment

Segment	Q4 FY2025 (Billion CNY)	Q4 FY2026 (Billion CNY)	YoY Change	Comments
China E-commerce	39.7	24.0	-40%	Quick commerce subsidies
AIDC (International)	-3.6	-0.1	96%	Approaching breakeven
Cloud Intelligence Group	2.4	3.8	57%	Revenue + efficiency improvements
All Others	-3.4	-21.2	-520%	Qwen app user acquisition
Consolidated	32.6	5.1	-84%
Source: Alibaba’s earnings presentations.  Data as of 31 March 2026.

Cloud and AI are becoming the core investment story

The strongest part of Alibaba’s results was unquestionably cloud computing. AI-related revenue now contributes around 30% of Alibaba Cloud’s external revenue, up from low single-digit percentages two years ago. CEO Eddie Wu guided that annualised recurring revenue from AI model and application services could exceed CNY10 billion in the June quarter and CNY30 billion by December 2026. This implies potential tripling within months. Management also expects AI-related revenue to exceed 50% of cloud external revenue within one year.

Alibaba currently possesses one of China’s most vertically integrated AI ecosystems, spanning proprietary foundation models (Qwen), cloud infrastructure and self-designed inference chips (T-Head Zhenwu PPUs). More than 100,000 of these chips have reportedly been deployed within Alibaba Cloud, while over 30 automakers are using them for intelligent driving R&D. This full-stack capability is becoming increasingly valuable under ongoing US export restrictions on advanced semiconductors.

The downside is clear: AI expansion is extremely capital intensive. Alibaba’s free cash flow swung from positive CNY 73.9 billion to negative CNY 46.6 billion in FY2026. Total capital expenditure reached CNY 126.1 billion, up 36.8% year-on-year, as Alibaba accelerated investment into AI training infrastructure, inferencing facilities and global data centre expansion. The management remains committed to investing CNY 380 billion over the next three years into AI infrastructure and cloud development.

While this creates near-term earnings and cash flow pressure, Alibaba believes these investments are necessary to secure long-term AI leadership. Importantly, the company still maintains roughly CNY 520 billion in net cash, giving it substantial financial capacity to continue investing.

The market is repricing the Chinese internet companies   

The most important takeaway from both Tencent and Alibaba’s results is that investors are increasingly focused on the quality and composition of growth rather than headline revenue figures alone. What matters now is the sustainability of AI monetisation and the credibility of the long-term growth infrastructure being built beneath the headline numbers.

Tencent and Alibaba are approaching this opportunity differently. Tencent is converting AI investment into near-term monetisation. Advertising revenue growing 20% year-on-year is real, measurable evidence of that. Alibaba, by contrast, is taking a longer-term approach, accepting near-term pressure on earnings and cash flow in exchange for what could become structural leadership in AI and cloud computing.

Both strategies reinforce the broader investment case for Chinese technology companies. AI is no longer purely a conceptual growth theme, it is increasingly showing up in monetisation, infrastructure spending, and ecosystem expansion. As such, we continue to see attractive long-term opportunities within the Chinese technology sector.

Based on our estimates, the HSTECH Index could reach HKD 7,760 by FY2028, implying approximately 53% upside from current levels. This would translate into an indicative level of HKD 16.3 for the iShares Hang Seng Tech ETF (HKEX: 3067) and SGD 1.2 for the Lion-OCBC Securities Hang Seng Tech ETF (SGX: HST).

Table 4: Projections for the Hang Seng Tech Index

	2025	2026E	2027E	2028E
PE Ratio (X)	20.2	18.8	16.5	14.7
Earnings Growth (YoY%)	4.7%	7.6%	13.8%	12.1%
EPS	251.3	270.4	307.8	345.0
Dividend Yield	1.1%	1.2%	1.2%	1.3%
Projected Fair Price (HKD)				7,762
Upside (Based on fair PE ratio of 22.5X)				52.9%
Source: Bloomberg Finance L.P., iFAST estimates Data as of 14 May 2026.

Figure 1: Share price vs. EPS chart for Hang Seng Tech Index

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a NIL position in the abovementioned securities. The analyst who produced this report hold iShares Hang Seng Tech ETF (HKEX: 3067).