China Internet: The second-most important driver could be turning
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China Internet: The second-most important driver could be turning
Bernstein believes that aside from the long-term impact of AI, a marginal pullback in Alibaba’s spending on instant retail/quick-commerce may be a key near-term variable for improving sentiment and earnings expectations in the China Internet sector.
- The report says that since Q2 2025, Alibaba, JD and Meituan have spent a combined about RMB120bn on instant retail/quick-commerce, and if competitive intensity eases, this should help sector stock performance.
- If Alibaba reallocates around RMB40bn from instant retail losses to AI capex, theory suggests Alibaba Cloud revenue growth could rise by about 7-8 percentage points, but All Other losses would still weigh on the group PE valuation.
- With JD re-emphasizing profitability, a lower 2026H2 base, potential buybacks and low valuation, the report sees its risk-reward as leaning higher.
- Although Tencent is not the most leveraged stock, its core gaming and advertising businesses remain robust, evidence of AI disruption to the WeChat ecosystem is still insufficient, and valuation is more attractive after excluding AI investment and listed equity investments.
- Sentiment in video gaming appears to have stabilized, with domestic game license supply abundant; Tencent and NetEase inflection points depend respectively on AI breakthroughs and surprises in the product pipeline.
Report interpretation
Overview
This report is a China Internet sector research note. The core question is whether the second-most important driver for the sector—food delivery and instant retail competitive spending—may be approaching an inflection point while the long-term AI impact remains debated. Bernstein argues that the China Internet sector started 2026 weakly, with KWEB down about 14% year-to-date, but that Alibaba, JD and Meituan’s spending intensity in instant retail/quick-commerce may be starting to ease, improving investor sentiment, earnings expectations and valuation.
Core views
The central view is that Alibaba’s capital allocation choices will influence several China Internet stocks over the coming months. Because free cash flow is under pressure, Alibaba may need to choose more clearly between instant retail losses and AI/cloud investments; if instant retail competition cools, Alibaba, JD and Meituan could all benefit. JD’s earnings orientation and low valuation create upside; Tencent remains a more defensive choice, with resilient core gaming, advertising and lightly monetized Mini Programs/Shop ecosystem; NetEase’s growth could improve as deferred-revenue recognition normalizes.
Analysis framework
The report combines company-level coverage review, earnings forecast updates, valuation comparisons, and free cash flow and capital allocation analysis. Key focuses include Alibaba cash inflows versus AI/instant retail cash outflows, JD profitability and shareholder returns, Tencent gaming and advertising trends, Chinese e-commerce GMV and digital ad growth, game licensing and deferred revenue, and relative valuation discounts of China Internet platforms versus global peers.
Methodology notes
Uses FY+1 PE, 2026E/2027E PE and SOTP to assess company valuation.
Tencent’s target price is based on lower earnings forecasts and a constant 20x FY+1 PE; JD’s target price is based on a constant 9x FY+1 PE with an upward adjustment to longer-term earnings; Alibaba’s target remains SOTP-based, but short-term group-level PE constraints remain important.
Compares core e-commerce and cloud EBITA inflows with AI capex, All Other losses and instant retail losses as cash outflows.
The report argues Alibaba’s cash outflows are increasingly close to or exceeding cash inflows, forcing management to make clearer choices between instant retail spending and AI/cloud spending.
Uses major-platform GMV, listed-platform advertising revenue, game licenses and deferred revenue to track sector conditions.
The report states that in Q4 2025, GMV across the top five e-commerce platforms rose about 6.1% year-over-year, revenue across 20 listed digital advertising platforms rose about 6.8% year-over-year, and 453 new domestic games were approved in the first quarter of 2026, up 25.1% year-over-year.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Alibaba / BABA / 9988.HKCore variable; capital allocation will determine sector competition intensity and pace of AI spending.
- Strengths
- It is one of China’s largest cloud providers, with the Qwen model, chip R&D capability and more than RMB600bn in net cash and equivalents; reducing instant retail losses could improve investor confidence in capital allocation and SOTP valuation.
- Weaknesses
- Free cash flow is under pressure, All Other losses remain high, core Taobao & Tmall returns are limited, and group PE valuation is dragged down by loss-making businesses.
- Comparison
- Compared with regulatory pressure, the report believes Alibaba’s own strategic-priority shifts are a more durable and critical driver of normalization in competition.
- Risks
- If Alibaba continues to over-invest in instant retail or AI monetization develops slower than expected, cash flow and valuation may remain suppressed.
- JD / JD / 9618.HKMain leveraged beneficiary of easing competition, earnings orientation and low valuation.
- Strengths
- Q1 profit appears better than expected, 2026H2 base is low, management emphasizes profitability, and dividends plus potential buybacks improve shareholder returns.
- Weaknesses
- The Chinese e-commerce market is low-growth and highly competitive, and investor-friendly phases have not always persisted historically.
- Comparison
- The report argues the scale of cost savings may exceed new reinvestment into new businesses, skewing risk-reward to the upside.
- Risks
- Renewed marketing intensity in the promo season, overseas Joy Buy expansion, or a re-acceleration in e-commerce competition could pressure profits.
- Meituan / 3690.HKPotential beneficiary of easing instant retail competition, still influenced by Alibaba strategy.
- Strengths
- The stock has already responded positively to regulatory and competition easing, and earnings expectations could recover if secondary drivers improve.
- Weaknesses
- Alibaba may still maintain above-2021 levels of presence in food delivery and instant retail and focus on higher-AOV orders.
- Comparison
- Compared with 2021, when Ele.me’s impact was relatively limited, the current competitive landscape is more complex.
- Risks
- Alibaba’s ongoing spend on high-AOV orders, and Bytedance competition in dine-in, hotels and travel.
- Tencent / 700.HKA defensive pick influenced by AI, gaming and advertising trends.
- Strengths
- Core gaming and advertising businesses remain strong, Mini Programs/Shop monetization is light-touch, lower platform fees support profit growth, and AI use has not yet demonstrated a clear case of displacing WeChat.
- Weaknesses
- Not the highest-beta stock, and higher AI spending has led to lower earnings forecasts.
- Comparison
- The report uses Tencent’s valuation relative to Meta and Alphabet average PEs to gauge China equity geostrategic discount, and notes this discount has been broadly stable recently.
- Risks
- A longer payback cycle on AI spending, slower game growth, or cyclical pressure on advertising.
- NetEase / NTES / 9999.HKBeneficiary of gaming normalization and deferred revenue normalization.
- Strengths
- Billing growth and underlying monetization trends are robust, domestic game license supply is ample, and growth may accelerate a few quarters out.
- Weaknesses
- Longer deferred-revenue recognition periods make short-term profit and revenue interpretation more difficult.
- Comparison
- Compared with Tencent, NetEase’s inflection point depends more on pipeline surprises and specific game launch timing.
- Risks
- Product delays or underperformance of pipeline titles such as Sea of Remnants or Ananta.
Key data
- KWEB YTD performance-14%The report says the China Internet sector started 2026 difficult, with KWEB down 14% year-to-date.
- Total instant retail/quick-commerce spendingabout RMB120bnThe report estimates Alibaba, JD and Meituan have spent about RMB120bn combined since Q2 2025.
- Alibaba Q4 related outlaysabout RMB36bn total lossesThe report says Alibaba, Meituan and JD had a combined Q4 loss of about RMB36bn in food delivery and instant retail.
- Potential AI capital reallocation impactRMB40bn shifted to AI capex could lift Alibaba Cloud revenue growth by about 7-8 percentage pointsThe report applies an assumed 3:1 relationship between AI capex and incremental Alibaba Cloud revenue.
- JD valuation10.7x 2026E PE; 7.9x 2027E PEIf 2027E profit exceeds 2024 levels, the report says 2027E PE could be near 7x.
- JD potential buyback yieldabout 2.3% capital return yieldBased on an assumed roughly USD1bn buyback for the year, about half of remaining authorized amount.
- China e-commerce GMV growthabout 6.1% year-over-year in Q4 2025Based on aggregated GMV growth from the five major e-commerce platforms.
- Digital advertising platform revenue growthabout 6.8% year-over-year in Q4 2025Based on tracking 20 listed digital advertising platforms.
- Domestic game license approvals453 in Q1 2026, up 25.1% year-over-yearThe report says domestic game supply pipeline remains smooth.
- Sector valuationcovered stocks average 14.8x 2026E PE, 13.1x 2027E PENear the lows seen in 2022-2023, supporting valuation re-rating discussion.
Impact & implications
In terms of investment implications, the report argues the market may begin to reprice the possibility that Alibaba shifts from instant retail losses to AI/cloud spending. Easing competition appears supportive for Alibaba, JD and Meituan stock performance in the near term, though Meituan still faces pressure from Alibaba maintaining higher presence and focusing on higher-value orders. JD appears more resilient due to earnings protection, lower valuation and capital returns; Tencent has lower beta but more stable risk-reward. Overall, sector valuation has retreated into an attractive range, but AI return on investment, regulation and weak consumption remain key uncertainties.
Risks
- AI training and inference costs could stay elevated for years, and returns on platform AI spending remain uncertain.
- China’s consumption and macro backdrop remain weak, so e-commerce and advertising growth could stay pressured.
- Food delivery and instant retail competition may reheat and weaken the earnings recovery thesis.
- Regulatory cycles remain an uncertainty, especially around food delivery, tax enforcement and platform-economy conduct.
- If Alibaba continues to expand All Other losses or fails to improve free cash flow, valuation recovery may be constrained.
- JD may reallocate first-half savings to marketing or new businesses, making earnings leverage lower than expected.
- The long-term impact of AI on consumer behavior and super-apps like WeChat is still not fully falsifiable.
What to watch
- Whether Alibaba formally signals that instant retail losses have halved or are still shrinking.
- After shifting RMB40bn-scale capital from instant retail to AI capex, whether Alibaba Cloud revenue growth and pricing can be delivered.
- Whether JD’s 2026H2 revenue re-acceleration and profit protection occur together.
- Tencent game sales, sequential acceleration in advertising, timing of AI product breakthroughs, and the impact on profitability from declining platform fees.
- NetEase deferred-revenue recognition normalization and dates for key new game launches.
- Meituan food-delivery average order margin, competition intensity with Alibaba for high-AOV orders, and Bytedance’s in-store business actions.
- China e-commerce GMV, digital advertising revenue, game licenses, AI app activity and the valuation discount of China internet stocks versus global internet peers.