Tencent’s AI spending weighs on profit forecasts: Barclays cuts price target but remains positive on the WeChat ecosystem

Why were profit forecasts cut sharply when revenue estimates barely changed?

Barclays trimmed its Tencent revenue forecasts for 2026 and 2027 by 0.2% and 0.3%, respectively, but cut its adjusted net profit forecasts by 6.9% and 14.3% to approximately 236.4 billion yuan and 216.5 billion yuan. The revisions mainly reflect costs and expenses; forecasts for gaming and fintech and business services revenue remain unchanged.
The pressure is expected to continue into the following year. Barclays forecasts revenue of approximately 902.6 billion yuan in 2027, above the 822 billion yuan expected for 2026, but adjusted net profit is expected to fall. The forecast for the 2027 adjusted operating margin has been cut from 35.7% to 31.0%. Revenue growth and profit contraction are occurring at the same time, reflecting the squeeze on earnings from AI spending.
The earnings forecast is also well below market consensus: Barclays expects adjusted earnings per share of 24.19 yuan in 2027, versus the Bloomberg consensus of 30.87 yuan cited in the report.

Tencent’s capital expenditure in the second quarter of 2026 was 59 billion yuan. Barclays expects this quarterly spending level could continue through the end of 2027, meaning heavy investment would extend throughout the second half of 2026 and all of 2027, rather than being concentrated in one quarter.
Investment affects profit through two channels: infrastructure investment brings higher depreciation, while operating spending such as AI R&D increases research and development expenses. Barclays has therefore lowered its subsequent earnings forecasts while broadly maintaining its revenue outlook.
According to the bank’s research, Tencent also paid 50 billion yuan in advances in the second quarter, mainly for memory chips and other semiconductors. It may continue making prepayments in the third and fourth quarters to secure better component procurement prices. These payments arrange funding for purchases in advance and cannot be treated directly as expenses on the current period’s income statement.

Barclays believes infrastructure expansion over the next several quarters will primarily serve the computing needs of Tencent’s internal AI products, including a consumer-facing WeChat AI assistant. Procurement and construction come first, corresponding to the bank’s expectation of growing demand for product use.
The WeChat AI assistant is being tested. Barclays sees potential for it to become a general-purpose consumer assistant, based on the breadth and depth of the WeChat ecosystem, particularly its mini programs. The range of services the assistant can connect to is an important foundation for Tencent’s development of such products.
On the enterprise side, Tencent already has offerings such as WorkBuddy and CodeBuddy. Barclays believes it has an early advantage in enterprise AI agents. However, near-term commercial revenue from these products may be limited, so a leading product position and short-term profit pressure can coexist.

Barclays cut its price target for Tencent’s TCEHY from 106 dollars to 88 dollars, a reduction of approximately 17%, while maintaining its Overweight rating. Its rationale remains improving fundamentals, stable growth prospects and a more supportive regulatory environment for platform companies.
The 88-dollar price target uses a sum-of-the-parts valuation: multiples of 10, 15 and 15 are applied to nominal 2027 EBITDA for value-added services, marketing services, and fintech and business services, respectively, before adding the discounted value of equity investments and net cash. The earnings forecast cuts lower the price target, but the bank retains its positive assessment of Tencent’s long-term business position.