Goldman: 1Q China large-cap internet revenue is resilient with cloud and AI as highlights, but profits remain weighed down by AI and instant retail investment

Overview

This report is Goldman’s pre-earnings framing for China large-cap internet names before 1Q results, primarily covering Tencent, Alibaba, PDD, Meituan, and JD. Goldman expects the industry to present a mix of 'stable revenue, accelerating cloud, pressured profits, and rising AI spending': cloud revenue growth and fair-value gains from AI model investments may be key highlights, but AI infrastructure, consumer AI subsidies, instant retail, and local-living competition are expected to pressure near-term profits.

Core views

The core views include: first, cloud computing and AI token demand are the most important positive variables, with Alibaba Cloud expected to grow 40% in 1Q and potentially benefit from pricing increases and contract-based MaaS; second, AI capital spending is a key market debate, with Tencent’s relatively balanced capex strategy contrasted with Alibaba’s more aggressive 'all-in/zero-FCF' approach; third, trading-platform profits are under short-term pressure, but narrowing instant-retail losses, improving take-out unit economics, and a 2H26 low base are expected to support profit recovery; fourth, competition in e-commerce and local-living remains intense, with Alibaba’s CMR expected to rise only 1%, Meituan needing to defend against Douyin, and JD also facing pressure from retail and new-business investment; fifth, after valuation discounts on large caps, cloud and data-center, e-commerce and mobility, and gaming and entertainment are the subsector themes Goldman ranks highest.

Analysis framework

The report combines top-down industry trends with bottom-up company earnings-forward analysis: it first reviews China internet sector revenue and profit trends, AI model and cloud demand, capex, and unit economics, then compares Goldman’s forecasts with Visible Alpha consensus expectations for each company, and finally provides key call-watch topics, valuation methodology, and major risks.

Methodology notes

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  The report applies 12-month SOTP target prices to Tencent, Alibaba, Meituan, JD and others by summing core business, cloud, international business, and new-business segments using different multiples or value assumptions.

• Factor analysisGS Factor Profile

  Comparative percentiles across growth, financial returns, valuation multiples, and combined factors

  Goldman’s factor framework compares stocks against the market and industry peers using percentiles on sales, EBITDA, EPS, ROE, ROCE, CROCI, P/E, P/B, and EV/EBITDA.

• M&A AssessmentM&A Rank

  Takeover probability grading

  Goldman’s M&A Rank classifies covered companies into three levels of potential take-over probability: 1 for 30%-50%, 2 for 15%-30%, and 3 for 0%-15%; if ranked 1 or 2, M&A optionality may be incorporated into the target price.

• Industry trackingVisible Alpha Consensus Comparison

  Comparison of Goldman forecasts against consensus expectations

  In the company tables (including Tencent), the report compares Goldman 2026E/2027E and quarterly forecasts with Visible Alpha consensus to identify key items that may come in ahead of or behind expectations.

Asset mapping & comparison

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

• Tencent / 0700.HK

  Core covered name, Buy, 12-month SOTP target price HK$700

  Strengths

  Gaming and advertising growth remain resilient, AI-targeted advertising, Weixin in-app AI agents, and cloud and enterprise services have long-term potential, and capex strategy is relatively balanced.

  Weaknesses

  Rising AI-related costs may compress margins, and OS-level AI agents could change user entry points; game launches and gaming license approvals remain uncertain.

  Comparison

  Compared with Alibaba’s more aggressive AI capex, Tencent is described as more balanced; compared with Meta advertising growth, Tencent still has room for discussion on ad load rates and pricing power.

  Risks

  Escalating ad competition, delayed game launches or licensing, lower-than-expected growth in FinTech and cloud, and reinvestment risk.

• Alibaba / BABA / 9988.HK

  Core covered name, Buy, 12-month SOTP target price US$186/HK$180

  Strengths

  Alibaba Cloud is expected to accelerate to 40% under token demand, with MaaS, multi-year contracts, and price increases potentially improving cloud revenue and margins.

  Weaknesses

  CMR is expected to grow only 1%; Taobao-Tmall merchant incentives, AI capex, and instant-retail spending are expected to drive a sharp YoY decline in group adjusted EBITA.

  Comparison

  Capex strategy is closer to an 'all-in/zero-FCF' approach, contrasting with Tencent’s more balanced approach; cloud growth is benchmarked against Google Cloud, AWS, and Azure.

  Risks

  GMV growth below expectations, slowing monetization in retail, underperformance in strategic investment execution, and weaker cloud revenue growth.

• PDD / PDD Holdings

  Core covered name, Buy, 12-month target price US$158

  Strengths

  1Q adjusted EBIT is expected to rise 37%, adjusted net profit +55%, cash flow is strong, and both domestic business and Temu retain growth optionality.

  Weaknesses

  Temu faces European tariffs, de-minimis policy, and a shift to a local fulfillment model; limited segment disclosure increases estimate uncertainty.

  Comparison

  Compared with traditional e-commerce platforms, PDD still benefits from low pricing and transaction commission growth, but also faces Douyin, Alibaba’s low-cost adtech, and changing international policy.

  Risks

  Online marketing revenue below expectations, geo/policy and tariff pressure, intensifying competition, reinvestment squeezing profits, and limited segment disclosure.

• Meituan / 3690.HK

  Core covered name, Buy, 12-month SOTP target price HK$112

  Strengths

  There are signs of improving food-delivery unit economics, instant-retail losses may narrow, and long-term local-living distribution retains value.

  Weaknesses

  1Q adjusted EBIT is expected to shift to RMB-7.8bn, with pressure from local-service competition such as Douyin and Keeta expansion spending.

  Comparison

  Similar to Alibaba quick commerce and JD food delivery, the market focuses on the pace of loss narrowing; local-living GTV and traffic entry points require defense against Douyin.

  Risks

  Competition exceeding expectations, profit inflection slower than expected, rising labor costs, food safety and regulatory risks, and Keeta spending above expectations.

• JD / JD.com / 9618.HK

  Core covered name, Buy, 12-month SOTP target price US$43/HK$169

  Strengths

  The largest 1P retailer in China’s supply chain and fulfillment capabilities form a moat, and new-business losses are expected to narrow versus 4Q25.

  Weaknesses

  1Q adjusted EBIT is expected to fall 81% YoY, new-business remains loss-making, and Joybuy’s European expansion plus food-delivery spending create profit pressure.

  Comparison

  Compared with platform-based e-commerce, JD’s 1P retail and supply-chain strengths are more visible, but changing search and purchase entry points under AI agents require renewed differentiation.

  Risks

  Intensifying competition in e-commerce and food delivery, GMV slowdown, high base in consumer electronics, underdelivery in supermarkets and 3P ecosystem execution, and volatile retail margins.

Key data

• China internet sector March-quarter profit growth-28% YoYGoldman expects total profit to decline 28% year-over-year, versus -23%/-35% for the 2025 September/December quarters.
• Tencent 1Q estimateRevenue +11% YoY; adjusted EBIT +10% YoY to RMB76.2bnGaming revenue is expected to rise 15%, advertising revenue 17%, and FBS revenue 7%, with OPM around 38.3%.
• Alibaba 1Q/FY4Q estimateCMR +1% YoY; cloud revenue +40% YoY; adjusted group EBITA -84% YoYTaobao and Tmall merchant incentives, AI capital spending, and instant-retail investment are weighing on profits.
• PDD 1Q estimateRevenue +13% YoY; adjusted EBIT +37% YoYOnline marketing revenue is expected to be RMB51.9bn, transaction commission revenue RMB55.9bn, and adjusted net profit RMB26.2bn.
• Meituan 1Q estimateRevenue +6% YoY; adjusted EBIT -178% YoY to RMB-7.8bnLocal-living competition, delivery economics, and Keeta investment are key variables.
• JD 1Q estimateRevenue +3% YoY; adjusted EBIT -81% YoY to RMB2.2bnJD Retail profit is expected to be RMB12.6bn, new-business losses RMB-10.4bn, and group net profit RMB5.1bn.
• Alibaba Cloud growth+40% YoYDriven by token demand, AI agents, and MaaS demand; the report focuses on pricing power, contract structure, and cloud margin.
• Fair-value gains from AI investmentsAlibaba about HK$31bn; Tencent about HK$11bn; Meituan about HK$12bnEstimated 1Q mark-to-market gains from equity stakes in AI model companies such as MiniMax and Zhipu.
• Large-cap YTD price performancedown about 9%-26%The report notes that after the declines, Alibaba/Tencent are valued at about 2027E adjusted P/E multiples of 18x/13x.

Impact & implications

For investors, the key near-term question is not just whether a single quarter’s profit is under pressure, but whether AI capex can be converted into cloud revenue, pricing power, and long-term customer lock-in; investors also need to watch whether instant-retail and delivery losses continue to narrow. If cloud demand and 2H26 trading-platform profit recovery materialize, the current valuation discount could offer upside risk, but if capex exceeds expectations, competition worsens, or cloud growth slows, profit and free-cash-flow expectations may continue to be reset lower.

Risks

• AI capex above expectations putting pressure on free cash flow and margins.
• Cloud revenue growth or token demand below expectations, weakening the AI return on investment thesis.
• Competition in e-commerce, local services, and instant retail intensifies, keeping subsidy, merchant incentive, and marketing spend elevated.
• International expansion by Temu, Joybuy, and Keeta is affected by tariffs, regulation, fulfillment, and competition, making return on investment uncertain.
• Execution risks exist across game launch timing, license approvals, ad demand, FinTech, and cloud growth.
• Fair-value gains from AI model investments are non-cash and could reverse with market valuation volatility.

What to watch

• Tencent’s earnings call comments on AI hyperscaler strategy, Weixin app-level AI agents, AI-targeted advertising, and game pipeline.
• Alibaba Cloud 6-month outlook, pricing hikes, MaaS ARR, Alibaba Token Hub/Wukong enterprise platform, and cloud margin.
• Whether Alibaba puts greater emphasis on core cash flow to support multi-year AI capex, and the speed at which instant-retail losses narrow.
• PDD updates on Temu local warehouse/local merchant model, European tariff policies, domestic GMV, and AI adtech.
• Meituan delivery unit economics, Douyin local-living competition, Keeta expansion in Latin America, and the margin inflection point.
• JD Retail margins, new-business losses, Joybuy’s European expansion, food-delivery UE trajectory, and capital-allocation priorities.
• Whether 2H26 trading-platform profits recover to positive YoY growth after the high-base effect fades.