Goldman Sachs: Continue to prefer China Internet cloud and data centers, and raise preference for e-commerce and mobility

Overview

This report is Goldman Sachs' China Internet industry research released after the 4Q earnings season and related channel checks, focusing on AI investment, cloud and data centers, model competition, platform regulation, e-commerce and local services competition, overseas expansion, and shareholder returns. The report notes that the China Internet sector has been under pressure year to date, with HSTECH down about 15%, and the median 2026E P/E at about 14x. The main headwinds come from downward EPS revisions due to AI investment, slower growth at the giants, free cash flow and depreciation concerns, and competition from ByteDance across multiple verticals.

Core views

Goldman Sachs continues to rank Cloud & Data Centers as the top sub-sector, citing expanding token demand driven by To-B agents, co-worker products, and To-C AI assistants, as well as improving cloud and token pricing power. eCommerce & Mobility was raised to second place, mainly because of attractive valuations, improving 1Q trends, and expected earnings recovery in 2H26; key names include PDD and Full Truck Alliance. Games & Entertainment ranks third, benefiting from user time shifting toward online entertainment, ad growth, and AI lowering content production costs. The report also believes Alibaba and Tencent, despite concerns over AI investment, model capabilities, ByteDance competition, and changing app entry points, still have the potential to improve risk-reward through full-stack AI capabilities, cloud, models, applications, and core ecosystem strength.

Analysis framework

The report combines sub-sector ranking, 4Q25 earnings review, 2026E forecast revisions, valuation comparisons, app time-spent tracking, an AI token demand and cloud capex framework, regulatory event tracking, and bottom-up analysis of key companies. The core judgment comes not only from financial data, but also from Internet Trip, investor meetings, expert conferences, the Top AI/apps tracker, and observations on ARR and token growth at AI companies such as Zhipu.

Methodology notes

• Sub-sector allocationChina Internet sub-sector preference ranking

  Rank China Internet sub-sectors by growth visibility, valuation, earnings recovery, AI benefit, and regulatory risk.

  The report places Cloud & Data Centers first, eCommerce & Mobility second, and Games & Entertainment third, and selects key stocks accordingly.

• AI and cloud revenueToken demand and cloud revenue growth framework

  Measure AI's impact on cloud businesses using token consumption, AI agent usage, MaaS revenue, cloud revenue growth, and capex-to-revenue conversion.

  The report emphasizes indicators such as ByteDance daily token volume, Alibaba Bailian MaaS token growth, Alibaba Cloud revenue growth, and the capex share of operating cash flow at Chinese hyperscalers.

• Valuation and earnings2026E P/E and earnings revision analysis

  Assess risk-reward through post-earnings revenue and profit revisions, 2026E valuation multiples, cash-adjusted P/E, and share-price performance.

  The report argues that EPS downgrades matter more than multiple compression, and that the next stock catalysts need to come from EPS recovery, changes in the AI narrative, overseas valuation, and shareholder returns.

• User behaviorTop apps tracker

  Monitor platform competition and traffic migration using DAU and time-spent trends.

  The report notes that Pinduoduo's DAU has already caught up with Taobao, Douyin's main app time spent is close to WeChat, and AI may continue to drive more time spent on online entertainment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Cloud & Data Centers

  Top pick sub-sector, directly benefiting from AI token demand, accelerating cloud revenue, and tight compute supply.

  Strengths

  Demand visibility is relatively high; enterprise agents, consumer AI assistants, and MaaS are driving cloud revenue growth. Key names include Alibaba, GDS, VNET, and Kingsoft Cloud.

  Weaknesses

  Requires sustained capex, and the market is closely watching investment returns and depreciation policy.

  Comparison

  Compared with transaction platforms, the growth logic for cloud and data centers benefits more directly from AI infrastructure demand.

  Risks

  Declining token prices, easing compute supply, capex efficiency below expectations, and intensifying competition at the model layer.

• eCommerce & Mobility

  Preference raised to second place, supported by low valuations, improved 1Q trends, and expectations for earnings recovery in 2H26.

  Strengths

  PDD and Full Truck Alliance are trading at low valuations; PDD has room for re-rating in its overseas business, and Full Truck Alliance has a shareholder-return and profit-compounding story.

  Weaknesses

  E-commerce competition remains intense, and quick-commerce losses and tax policy changes may weigh on profits.

  Comparison

  The risk-reward is better than in the previous ranking, and the report has raised this sub-sector from fourth to second.

  Risks

  Slowing consumption, Douyin competition, merchant tax impacts, widening quick-commerce losses, and regulatory changes.

• Games & Entertainment

  Ranked third, benefiting from longer time spent on online entertainment, AI content production efficiency, and ad growth.

  Strengths

  Tencent and Bilibili are key names; gaming is relatively less tied to the macro cycle, and AI can lower content-update costs and improve ad efficiency.

  Weaknesses

  Ad or subscription growth is slowing at some companies, and short-term gaming growth faces a tough base effect.

  Comparison

  Growth visibility is slightly lower than Cloud & Data Centers, but regulatory impact is smaller than in some other Internet verticals.

  Risks

  ByteDance competition, the potential impact of AI world models on casual gaming, content regulation, and time-spent migration coming in below expectations.

• Alibaba

  A key mega-cap idea, driven by cloud, Qwen, Token Hub, and e-commerce CMR improvement.

  Strengths

  It has a full-stack AI foundation across cloud, chips, models, and applications; Alibaba Cloud growth is likely to keep accelerating.

  Weaknesses

  Quick-commerce losses, Qwen model performance, AI talent retention, and AI capex funding needs are drawing investor attention.

  Comparison

  The report believes a breakthrough in AI models or chips could provide greater market-cap upside.

  Risks

  AI investment returns falling short of expectations, core e-commerce competition, a longer-than-expected quick-commerce profitability cycle, and cash flow pressure.

• Tencent

  A key mega-cap idea, with AI agents, the Weixin AI assistant, gaming, and advertising as the main drivers.

  Strengths

  The WeChat ecosystem and global gaming assets are unique, and AI could enhance gaming, ads, fintech, cloud, and e-commerce.

  Weaknesses

  AI investment in 2026-27 may lead to a short-term profit reset.

  Comparison

  The report believes its valuation is close to historical lows, and the rollout of AI models and agent products could improve the narrative.

  Risks

  Gaming growth normalizing, competition from ByteDance's AI Doubao and OS-level assistants, and AI product launches slower than expected.

• PDD Holdings

  A key e-commerce name, benefiting from low valuation, DAU catching up with Taobao, and Temu overseas re-rating potential.

  Strengths

  The current valuation only partially reflects Temu's value, and the report expects the international business and transaction-services revenue to keep improving.

  Weaknesses

  GMV growth is slowing, and e-commerce competition plus shipping price changes affect low-ticket orders.

  Comparison

  Among e-commerce platforms, PDD is seen as one of the key mega-cap ideas for the full year 2026.

  Risks

  Temu profit improvement slower than expected, cross-border regulation, domestic competition, and weak consumption.

• Full Truck Alliance

  A key mobility and freight-matching name, combining profit growth and shareholder-return themes.

  Strengths

  Industry leadership, network scale, transaction-service penetration, and higher take rates provide room for growth.

  Weaknesses

  Changes in the Manyunbao and credit-solutions businesses may affect short-term comparability.

  Comparison

  The report places it alongside PDD as a key idea in eCommerce & Mobility.

  Risks

  Weak freight demand, regulation, competition, and earnings recovery falling short of expectations.

Key data

• HSTECH year-to-date performance-15%The report says China Internet stock prices are down year to date, with HSTECH at -15% and NASDAQ at -12%.
• China Internet median valuation14x 2026E P/EThe report discusses sector valuation and earnings growth pressure using a median P/E of about 14x.
• China hyperscaler capex as a share of operating cash flow58% in 2026EThis is below the 89% average for U.S. hyperscalers and is used to support the view that Chinese cloud giants still have room for AI investment.
• ByteDance daily token volume100bn daily tokensThe report says ByteDance's token volume doubled again over the past three months to 100bn daily tokens.
• Alibaba Bailian MaaS token growth6xThe report says Alibaba Bailian MaaS tokens grew 6x over the same period.
• Alibaba Cloud revenue growth forecastMar 2026 quarter 40%The report expects Alibaba Cloud revenue growth to improve further from 36% in the Dec 2025 quarter to 40%.
• MiniMax ARRUS$150mnMiniMax said its ARR reached US$150mn in February 2026.
• Zhipu ARRUS$250mnZhipu said on March 31, 2026 that ARR reached US$250mn, more than doubling from early March.
• PDD and Full Truck Alliance valuationmid-single digit ex-cash P/EThe report highlights these two names as key ideas in e-commerce and mobility, emphasizing their attractive valuations.
• Tencent valuation14x 2026E P/EThe chart shows Tencent at about 14x 2026E P/E and describes it as having a unique social ecosystem and trading near historical lows.

Impact & implications

The investment implication of the report is that the China Internet sector will still face near-term disturbances from AI spending, regulation, and competition, but structural opportunities are shifting from pure platform growth toward AI infrastructure, cloud, data centers, agent applications, overseas expansion, and shareholder returns. If AI token demand continues to expand and cloud pricing improves, the earnings visibility of the cloud and data center chain may be better than that of other sub-sectors; if competition in e-commerce and local services becomes more rational, platforms such as PDD, Full Truck Alliance, Alibaba, JD, Meituan, and DiDi may see profit recovery in 2H26. Investors need to distinguish between the short-term profit reset caused by AI capex and the long-term commercialization opportunity of AI.

Risks

• After AI capex increases, the ROI of cloud and model businesses, depreciation policy, and free cash flow may fall short of market expectations.
• ByteDance competition across music, e-commerce, local services, consumer AI, models, and infrastructure may continue to disturb Internet giants.
• AI-native super entry points, APIs, MCP, and agent-to-agent interactions may alter the traditional app ecosystem and ad traffic allocation.
• If food delivery and quick-commerce competition does not become more rational, profits at Meituan, Alibaba, and other transaction platforms may remain under pressure.
• Antitrust investigations, platform-economy regulation, tax policy changes, and HNTE qualification renewals may affect valuation and earnings.
• Fragmentation in model-layer competition, along with open source and distillation lowering entry barriers, may weigh on API token monetization and long-term profitability.
• Weak macro consumption may affect e-commerce, advertising, and local-services revenue growth.
• Overseas expansion businesses such as Temu, JoyBuy, and international food delivery investment face regulatory, subsidy, logistics, and profitability uncertainties.

What to watch

• AI revenue at Alibaba Cloud and other Chinese cloud providers, external cloud plus MaaS revenue growth, and pricing trends.
• Token volume, ARR, model performance, and agent product commercialization at ByteDance, Alibaba, Tencent, MiniMax, and Zhipu.
• The launch pace and user feedback in 2026 for Tencent HY 3.0, the Weixin AI agent, and Claw-related agents.
• Alibaba Qwen team restructuring, Token Hub commercialization, and progress in narrowing quick-commerce losses.
• Anti-involution regulation in food delivery, the timing of antitrust investigation closure, and the impact on subsidy intensity and industry margins.
• PDD DAU, Temu GMV, transaction-services revenue, and international business re-rating.
• Full Truck Alliance transaction-service penetration, take rate, shareholder returns, and progress in Manyunbao adjustments.
• Changes in DAU and time spent in the Top apps tracker, especially Douyin, WeChat, Taobao, Pinduoduo, and Bilibili.
• HNTE qualification renewal, income tax rates, VAT, and e-commerce merchant tax policy updates.
• China hyperscaler capex as a share of operating cash flow and cloud revenue conversion efficiency for capex.