Tencent's 1Q26 revenue is expected to grow steadily, while AI spending weighs on margins in the near term

Overview

This report is Morgan Stanley's preview of Tencent Holdings Ltd.'s 1Q26 results. The report believes Tencent's top line is still supported by games, marketing services, and FBS, but accelerating AI spending is pressuring margins in the near term. The analyst maintains an Overweight rating and HK$650 target price.

Core views

The core view is that normalized game growth can still offset a high base effect, with domestic and international games expected to grow 8.0% and 15.0% YoY, respectively; marketing services should improve as a result of ad tech, better WeChat Channels ad load, and easing e-commerce drag; FBS is supported by cloud demand, the pricing environment, and a consumption recovery; but AI spending will cause non-IFRS operating profit growth to lag revenue growth.

Analysis framework

The report focuses on 1Q26 revenue and profit previews by segment, combined with Morgan Stanley ModelWare estimates, a DCF and SOTP valuation framework, and a risk/reward analysis of revenue CAGR, profit margins, and valuation multiples under bull, base, and bear scenarios.

Methodology notes

• Earnings ForecastMorgan Stanley ModelWare

  Use Morgan Stanley's internal model to estimate revenue, gross margin, non-IFRS operating profit, and net profit.

  The report notes that, unless otherwise specified, all metrics are based on the Morgan Stanley ModelWare framework, with some data from Morgan Stanley Research estimates.

• Valuation methodsDCF-based SOTP

  Use DCF to estimate the value of core businesses and add the value of associate investments to per-share target price.

  The HK$650 target price is composed of HK$560/share for core businesses and HK$90/share for associate investments. The core-business DCF assumes a 10% discount rate and 3% perpetual growth rate, while investment value is discounted by 30%.

• Risk/RewardRisk Reward

  Compare revenue CAGR, non-GAAP OPM, and P/E multiples across bull, base, and bear scenarios.

  The base case uses 2025-30E revenue CAGR of 9%, 2026E non-GAAP OPM of 35%, and 2026E P/E of 19x; the bull and bear cases reflect stronger monetization or competitive pressure, respectively.

Asset mapping & comparison

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

• Tencent Holdings Ltd. (0700.HK)

  Covered company and rating subject

  Strengths

  Leads China's online consumer market in traffic and revenue scale, and most services rank among the top three by user scale; global gaming, social advertising monetization, fintech, and enterprise services form the earnings leverage.

  Weaknesses

  Higher AI spending is pressuring near-term margins, and social network growth is below previous expectations.

  Comparison

  The report says Tencent typically enjoys a valuation premium among China's internet leaders because of revenue growth and earnings visibility; the target price implies a 2026E P/E of 19x.

  Risks

  Intensifying competition, user time being diverted to emerging entertainment formats, game regulation uncertainty, antitrust regulation, and China-U.S. relations risks.

Key data

• 1Q26 revenue growth forecast+9.8% YoYMorgan Stanley expects Tencent's 1Q26 revenue to grow 9.8% YoY.
• 1Q26 non-IFRS operating profit growth forecast+7.1% YoYOperating profit growth is lower than revenue growth, mainly reflecting higher AI spending.
• 1Q26 VAS revenue growth forecast+6.9% YoYOnline games are expected to grow 10.0%.
• Domestic game growth forecast+8.0% YoYGrowth normalizes somewhat due to a high base and the later timing of the Spring Festival.
• International game growth forecast+15.0% YoYOverseas growth remains strong, but the tailwinds from M&A and the Supercell deferred cycle are fading.
• Marketing services revenue growth forecast+19.0% YoYDriven by ad tech, increased ad load on WeChat Channels, and easing e-commerce drag.
• FBS revenue growth forecast+9.5% YoYImproves from 8.4% in 4Q25, with commercial services growth potentially accelerating to 25%.
• Target priceHK$650Target price unchanged, based on a DCF-driven SOTP framework.
• Core business DCF valueHK$560/shareAssumes a 10% discount rate and 3% perpetual growth rate.
• Associate investment valueHK$90/shareBased on the reported book value and a 30% discount applied to investment value.

Impact & implications

The implications for Tencent are mildly positive: revenue growth remains resilient, with support from games, advertising, cloud, and payments, and AI could open long-term 2C application opportunities; however, near-term margins and operating profit growth will be weighed down by AI spending, so the market needs to balance growth quality against the investment cycle.

Risks

• AI investment is pressuring near-term margins.
• Competition in social networks and online entertainment is intensifying.
• Emerging entertainment formats are challenging user time and advertising budgets.
• Game industry regulation remains uncertain.
• Antitrust regulation and strained China-U.S. relations may create risks.
• If new game launches or ad monetization fall short of expectations, revenue growth may come in below the base case.

What to watch

• Whether actual 1Q26 revenue and non-IFRS operating profit meet the 9.8% and 7.1% YoY growth expectations.
• Domestic and international game growth, especially the performance of Valorant Mobile, Assault Fire: Future, Roco Kingdom: World, and HoK World.
• WeChat Channels ad load, ad tech effectiveness, and advertiser ARPA expansion.
• The degree of improvement in cloud revenue growth, the pricing environment, and commercial payments as consumption recovers.
• The impact of AI opex doubling on 2026 margins and non-IFRS OP growth.
• Adoption of 2C AI applications and long-term commercialization progress.