Cloud Acceleration, Profits Bottoming Out: Key Highlights for Large Internet Companies in Q2

Overview

This is a navigational commentary by Goldman Sachs ahead of the Q2 earnings releases for China's large internet stocks, covering Tencent, Alibaba, PDD, Meituan, and JD.com. The report's core judgment is that while overall advertising growth slows alongside macroeconomic softness, accelerated cloud business growth and stepped-up AI capital expenditures become the most certain bright lines; meanwhile, profits in trading platforms like food delivery are turning corners, and the overall internet sector's year-on-year profit decline will narrow significantly from -35%/-31% in the previous two quarters to -12%. The firm maintains Buy ratings on all five companies and raises Meituan's target price by 6% to HKD 123.

Core views

The report structures its Q2 earnings judgments around four main themes. Cloud business and AI capital expenditure are the biggest highlights of this earnings cycle. Goldman Sachs expects Alibaba Cloud's Q2 growth to accelerate from 38% in Q1 to 45%, with cloud margins rising to 11.1%; overall quarterly AI capital expenditure is projected to jump from RMB 20-30 billion in Q1 to RMB 40-50 billion in Q3/Q4, driven by the ramp-up of domestic chip supply and surging token demand from agentic AI. Goldman Sachs also compares US cloud vendors' Q2 cloud growth of 37-82%, pointing out key differences for Chinese vendors: significantly lower AI cloud margins (10-15% vs. AWS's latest quarter of 39%), lower overall valuations for internet stocks (leading to a preference for splitting businesses and financing to achieve higher valuations, e.g., Kuaishou Kling), and weaker growth in core businesses due to macro conditions and competition. Furthermore, Chinese cloud vendors have a higher conversion rate from capex to cloud revenue, mainly because capital expenditures were relatively restrained in the past 1-2 quarters, with domestic chips ramping up only in the second half of the year. The inflection point in trading platform profits is the second main theme. Goldman Sachs expects Meituan Waimai's profit per order to recover from a loss in Q1 to RMB 0.4/0.7/0.8 (3Q26E/4Q26E/FY27E), raising long-term Waimai EBIT per order from RMB 1.0 to RMB 1.1; therefore, it has substantially revised up Meituan's adjusted net profit forecasts for 2026-28 to RMB 8.3/30.1/43.4 billion (previously -0.1/24.5/42.3 billion), raising the target price from HKD 116 to HKD 123. JD.com's adjusted EBIT is expected to surge 587% YoY to RMB 6.2 billion, and Meituan's adjusted EBIT is expected to grow 56% YoY to RMB 5.8 billion. The overall sector's Q2 profit year-on-year decline narrows to -12%, with Alibaba's adjusted EBITA declining 33% YoY due to AI investments (but EPS downward revision cycle is seen as bottoming, with group EBITA returning to growth starting in Q3); Tencent and PDD's adjusted EBIT are +9% and -4% respectively. SOTP valuation and value release through spin-offs is the third thread. Goldman Sachs expects large-cap stocks to disclose more details on AI models/agent applications, cloud+chip businesses, and the rapid growth of overseas e-commerce businesses (such as Temu, Keeta, Joybuy) in their Q2 earnings, strengthening the SOTP segment valuation logic and becoming a focus for investors. Company-specific focal points also show clear differences. For Tencent, the focus is on AI compute allocation priorities, Hunyuan model strategy, WorkBuddy/WeChat Agent metrics, and whether H2 game growth can offset the weakness in the third-party market. For Alibaba, the focus is on AI capex funding sources, Qwen's strategy in low-cost agentic segments, how e-commerce cash flow balances maintaining market share and feeding AI investments, and AI talent retention incentives. For PDD, the focus is on Temu's model transformation under US tariff and 'de-minimization' policies, outlook for main site OMS advertising, and whether shareholder return policies will be revalued. For Meituan, the focus is on the sustainability of Waimai profit per order, the pace of recovery in hotel/travel profits, the scale of Keeta overseas investment, and LongCat model strategy. For JD.com, the focus is on retail growth, shareholder returns, Joybuy internationalization investments, and progress in JD Technology/AI.

Analysis framework

Goldman Sachs employs a top-down industry framework combined with bottom-up company-by-company breakdown. Its analysis starts with four cross-industry themes—cloud growth, AI capital expenditure, trading platform profit inflection, and SOTP value release—which link the five companies with distinctly different business models, followed by quantitative earnings expectations (GSe) compared against market consensus (Visible Alpha) and key debate points during the earnings calls. On the cloud and AI line, Goldman Sachs extensively uses benchmarking against US cloud vendors: using US hyperscaler cloud growth rates, cloud margins, relationships between capex and OpCF, and capex-to-cloud-revenue conversion rates as reference points to infer the acceleration space and marginal changes for Chinese vendors. For Meituan's valuation, a SOTP segment valuation approach is used, directly mapping expected changes in long-term Waimai profit per order to target price adjustments, reflecting the transmission chain from unit economics to segment valuation to target price.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Analyzing cloud business acceleration and AI capex step-up using supply-side (domestic chip ramp-up, compute shortage) and demand-side (surge in tokens driven by agentic AI)

  Goldman Sachs attributes changes in cloud and AI capital expenditure to both supply and demand sides: the supply side sees domestic chips ramping up in H2 with a currently tight compute environment, while the demand side sees a surge in token consumption from agentic AI, jointly driving up cloud growth rates and capital expenditure scales.

• Valuation MethodSOTP Segment Valuation

  Using sum-of-the-parts valuation for diversified business companies like Meituan, Alibaba, and Tencent, pricing specific businesses separately

  Large internet companies have complex business lines where overall P/E ratios fail to reflect the value of each segment. SOTP values each business separately and sums them up, particularly suitable for scenarios where reports expect increased disclosure of AI/cloud+chip segments and rapid growth in overseas e-commerce, allowing for clearer release of suppressed value.

• Company Fundamentals and Financial FrameworkFree cash flow analysis

  Assessing the sustainability of AI investment financing using the relationship between capital expenditure and operating cash flow (capex-to-OpCF)

  When capital expenditure exceeds operating cash flow, companies need additional financing (e.g., equity financing by US cloud vendors). Goldman Sachs uses this indicator to judge the funding sources and pressure of Chinese cloud vendors' AI investments, noting that the ratio remains healthy for Chinese cloud vendors, with lower financing pressure than US peers.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Decomposing profit changes using profit per order (UE per order) for Meituan Waimai, and performing volume-price decomposition for order volume and average ticket size

  The core driver of trading platform profits is the unit economic model, i.e., profit per order multiplied by order volume. Goldman Sachs derives long-term profit potential by calculating Meituan Waimai's EBIT per order recovery path from losses to RMB 0.4/0.7/0.8, and adjusts the target price accordingly.

• Cycle and Prosperity FrameworkProsperity Inflection Point Analysis

  Judging the bottoming of the earnings revision cycle (e.g., Alibaba EPS downward revision cycle bottoming, trading platform profit inflection)

  The report frequently uses terms like 'inflecting' and 'bottoming', essentially identifying signals where earnings expectations turn from continuous downward revisions to stabilization and recovery, which is a key framework for timing and betting on expectation gaps.

Asset mapping & comparison

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

• Tencent Holdings (0700.HK)

  Steady growth in gaming + advertising, progress in AI models and agent applications (Hunyuan, WeChat Agent, WorkBuddy) are core highlights

  Strengths

  Healthy growth in Gaming +11%, Advertising +18%; distribution potential for agents within the WeChat ecosystem

  Weaknesses

  Entering high capex cycle from H2, pressure from rising depreciation; weakness in the third-party gaming market

  Comparison

  Adjusted EBIT +9% YoY, growth quality is mid-range among the five, balancing growth and investment

  Risks

  Intensifying performance advertising competition, delays in game launches/approvals, FinTech and cloud growth missing expectations, reinvestment risks

• Alibaba (BABA/9988.HK)

  Cloud acceleration and AI capex financing are core logic, SOTP spin-offs (Cloud + T-Head, Qwen) release value

  Strengths

  Cloud growth accelerates to 45%, margin improves to 11.1%; potential new segment disclosures via SOTP

  Weaknesses

  CMR -8% YoY, adjusted EBITA -33%, short-term profitability pressure; AI cloud margins far below US peers

  Comparison

  Largest short-term profit decline, but positioned as the stock with bottoming EPS downward revision and greatest elasticity

  Risks

  GMV growth missing expectations, monetization missing expectations, weak strategic investment execution, cloud growth slowdown

• PDD (PDD)

  Temu model transformation, shareholder returns, and main site monetization are core debate points

  Strengths

  Strong growth in transaction commissions +21%; strong free cash flow supports potential shareholder returns

  Weaknesses

  Online marketing revenue -3%, adjusted EBIT -4%; Temu faces pressure from tariffs/de-minimization policies

  Comparison

  Profitability under pressure but strong cash generation, dividend/buyback revaluation may be focused on

  Risks

  Advertising monetization missing expectations, geopolitical risks, intensified competition, reinvestment lowering margins, insufficient segment disclosure

• Meituan (3690.HK)

  Waimai UE inflection and recovery of hotel/travel profits are core upward revision logic

  Strengths

  Waimai EBIT per order recovers faster than expected, decreasing competitive intensity, upward adjustment of long-term profit space

  Weaknesses

  Slowing Waimai/Guanggao volume growth (+5%) under sustained high base; expanding Keeta overseas investment

  Comparison

  Largest magnitude of earnings forecast upward revision, best representative of trading platform profit inflection

  Risks

  Competition exceeding expectations, labor cost inflation, food safety regulation, Keeta investment exceeding expectations

• JD.com (JD)

  Low base high elasticity of adjusted EBIT +587% YoY, retail profit margins and Joybuy internationalization are highlights

  Strengths

  Healthy free cash flow cycle, outstanding shareholder return capability, rapid expansion of Joybuy

  Weaknesses

  Revenue -3% YoY, department store growth slowing; new business losses still high at -RMB 9.7 billion

  Comparison

  Healthiest free cash flow relative to capital expenditure among large internet stocks, stronger defensive nature

  Risks

  E-commerce/delivery competition exceeding expectations, GMV slowdown, high base in home appliances, retail margin volatility

Key data

• Alibaba Cloud Q2 Growth Rate (GSe)45%Significant acceleration from 38% in Q1, the brightest certainty highlight in the report
• China Internet Overall Q2 Profit YoY-12%Significantly narrowed from -35%/-31% in the previous two quarters
• AI Capex Quarterly ScaleRising from RMB 20-30 billion to RMB 40-50 billionExpected to step up significantly from 1Q26 levels in 3QE/4QE
• Meituan Waimai EBIT per Order (3Q-4Q26E/FY27E)RMB 0.4/0.7/0.8Previously RMB -0.1/0.0/0.6, faster recovery than expected
• Meituan 2026-28E Adjusted Net ProfitRMB 8.3/30.1/43.4 billionSubstantially revised up from previously -0.1/24.5/42.3 billion, mainly due to decreased competitive intensity
• JD.com Adjusted EBIT YoY+587%Combined with low base effect and improved Waimai UE
• Meituan Target PriceHKD 123Raised by 6% from previous HKD 116
• Tencent Q2 Revenue/Adjusted EBIT YoY+9%/+9%Gaming +11%, Advertising +18%, FBS +8%

Impact & implications

The research report believes that these changes have dual implications for the sector. On one hand, the acceleration of cloud and AI capital expenditure represents a structural opportunity, meaning the cloud and data center sub-sectors (GDS, VNET, Alibaba, Kingsoft Cloud) continue to rank first in sub-sector preferences, while AI models (MiniMax) rank last due to risk-return profiles leaning upwards. On the other hand, the inflection point in trading platform profits means the profit downward revision cycle that heavily dragged down the sector over the past two quarters is ending, and combined with the positive spillover from recovering US cloud vendor stock prices, the allocation environment for the second half is relatively friendly. For specific companies, although Alibaba's Q2 EBITA still declines significantly, the report expects its EPS downward revision cycle to bottom out and EBITA to return to growth starting in Q3; Meituan receives a target price increase due to Waimai UE and long-term profit recovery, becoming the标的 with the most obvious upward revision in earnings forecasts.

Risks

• Intensifying competition in the performance advertising industry may suppress Tencent's advertising monetization
• Delays in game launches or approval of game licenses missing expectations
• Alibaba Cloud growth slowdown or AI capex financing pressure exceeding expectations
• PDD's Temu faces uncertainties in European and American geopolitical and tariff policies
• Meituan Waimai competition exceeding expectations or excessive Keeta overseas investment dragging down profit recovery
• JD.com retail GMV slowdown, high base effect in home appliance trade-in programs, and margin volatility

What to watch

• Tencent: User metrics for WorkBuddy and WeChat Agent (DAU/WAU, task completion rate), rhythm of new games in H2 2026
• Alibaba: Whether Cloud + T-Head will be disclosed as a separate new business segment, progress on Qwen's ARR and MaaS targets
• PDD: Model transformation of Temu under de-minimization/tariff policies and whether shareholder return policies will be revalued
• Meituan: Sustainability of Waimai EBIT per order, pace of recovery in hotel/travel profits, scale of Keeta overseas investment
• JD.com: Budget for Joybuy internationalization investment, progress in JD Technology (FinTech and Cloud), execution of shareholder returns