Tencent Revenue Beats Estimates as Gaming and AI Advertising Lift Growth, but Profit Misses

Tencent posted better-than-expected second-quarter revenue as stronger growth in its China gaming business and AI-powered advertising helped offset weakness in international gaming, while higher spending on artificial intelligence infrastructure weighed on profitability.

The Chinese technology giant reported revenue of 204.78 billion yuan ($30.36 billion) for the quarter, compared with 202.17 billion yuan expected by analysts surveyed by LSEG. Net profit came in at 56 billion yuan, below the 61.82 billion yuan expected.

Revenue increased 11% from a year earlier, while reported net profit rose by less than 1%. On an adjusted basis, which excludes one-time items and certain non-cash charges, Tencent's profit increased 9% to 68.4 billion yuan.

The results underscore the competing forces shaping Tencent's business as it tries to accelerate growth in gaming and advertising while committing substantially more capital to artificial intelligence.

China's domestic gaming business was a key source of momentum. Revenue from domestic games rose 17% year over year to 47.3 billion yuan, accelerating sharply from 6% growth in the first quarter. Tencent attributed the increase to strong performance from titles including Delta Force and Valorant on PC and mobile.

The acceleration matters to investors because gaming remains one of Tencent's most important and profitable businesses. The company had faced a slowdown in domestic gaming growth earlier in the year, making the latest rebound an important indication that its newer titles are beginning to generate greater commercial traction.

International gaming, however, remained weaker. Revenue fell 0.8% from a year earlier because of currency movements, although it increased 4% on a constant-currency basis.

Tencent's advertising business provided another major source of growth, with marketing services revenue climbing 22% to 43.6 billion yuan. The company said improvements to its AI-powered advertising recommendation system helped drive the increase.

The technology uses artificial intelligence to determine which advertisements are most relevant to users across Tencent's platforms, including WeChat. The result gives Tencent a potentially powerful way to convert its enormous user base into higher advertising revenue without relying solely on increases in advertising volume.

AI is becoming increasingly central to that strategy.

Tencent operates WeChat and Weixin, which together have more than 1.4 billion users, giving the company an unusually large distribution network for AI-powered products and services. In June, it began testing an AI assistant called Xiaowei within WeChat in China. Tencent said Wednesday that the product has entered a "small-scale prototype test" in recent weeks.

The company also launched Hy3, its latest AI model, last month and has since expanded the model internationally.

Tencent faces intense competition as it tries to establish itself as a major player in China's AI market. Alibaba is investing heavily in its own AI capabilities, while startups such as DeepSeek and Moonshot AI, the developer of the Kimi models, have raised the competitive pressure on established technology companies.

The competition is also forcing Tencent to spend heavily on computing capacity.

Capital expenditure increased 65% from the previous quarter to 52.8 billion yuan as Tencent accelerated investment in computing infrastructure needed to train and run AI models.

"At the infrastructure level, we substantially stepped up our procurement of compute, which will enable us to convert usage of our applications and models into revenue going forward," Tencent said.

That spending represents a significant strategic shift. Tencent is effectively accepting higher near-term investment requirements in the hope that greater computing capacity will allow its AI products to scale and eventually generate substantial revenue.

The challenge for investors now is determining how quickly those investments will translate into returns.

Tencent's shares had fallen 26% year to date through Wednesday's close in Hong Kong, reflecting investor concerns about intensifying competition in China's AI industry and the company's rising capital requirements. The earlier slowdown in gaming growth had added to those concerns.

The second-quarter results provide some evidence that Tencent's established businesses can help finance its AI ambitions. Domestic gaming accelerated, advertising delivered strong growth, and gross profit increased across all of the company's major divisions.

However, the profit miss shows the immediate cost of that expansion. Tencent generated stronger revenue than expected but failed to meet the market's net profit forecast, with higher investment and other factors limiting the conversion of revenue growth into bottom-line earnings. The central issue for investors is therefore shifting from whether Tencent can participate in China's AI boom to whether it can monetize that investment at a pace that justifies the additional spending.

Tencent's huge consumer ecosystem gives it an advantage that many AI startups lack. Its ability to embed AI assistants, recommendation systems, and models into WeChat, gaming, advertising, and other widely used services could provide multiple channels for monetization.

For now, however, Tencent is spending ahead of that opportunity. The second quarter showed that its traditional businesses remain capable of generating growth, giving the company financial capacity to fund its AI expansion. The next test will be whether that spending produces meaningful AI revenue while preserving the profitability that has made Tencent one of China's most valuable technology companies.