(Bloomberg) -- With Alibaba Group Holding Ltd. grabbing the spotlight of investor attention over China’s success in artificial intelligence, Tencent Holdings Ltd. is still waiting for its turn to shine.
Alibaba’s Hong Kong-listed shares have risen more than twice as much as Tencent’s 30% gain so far this year on the boom sparked by DeepSeek. The latter’s earnings report due after Wednesday’s close will provide important clues on its potential to catch up, including how much it intends to spend to grow its AI business.
Tencent’s stock is still a little more than 30% away from a new record high, but that’s closer than many of its Chinese tech peers following Beijing’s crackdowns on corporate giants in recent years. Prospects of a new peak for one of the sector’s longtime leaders could help symbolize that the sector is truly back in business.
AI success for Tencent “could trigger renewed investor confidence in Chinese tech stocks,” said David Chen, chief investment officer of asset management at Tiger Brokers Hong Kong. It would “validate the significant investments being made across the sector and could lead to a positive revaluation of AI-focused Chinese tech companies.”
Beijing’s latest vow to boost consumption has added further momentum to the tech-led rally in Chinese equities. It’s also turning attention to how the internet firm co-founded by billionaire Pony Ma plans to commercialize AI to complement its chat app, game and internet advertising businesses.
Specifically, Chen says the market is looking for the firm to announce “substantial capital expenditure plans” for AI after Alibaba said it will invest more than 380 billion yuan ($53 billion) over the next three years. The game business will be the focus of Tencent’s earnings, especially overseas growth and the performance of the new title Delta Force, he said.
The company is expected to report 8.7% growth in sales for the December-ended quarter, the best in over a year. Analysts project a gross margin of 53.3%, holding near the highest level in eight years.
Updates on AI developments are key for the stock’s performance along with announcements on results and shareholder returns. Tencent on Tuesday released new AI services that turn text or images into 3D visuals and graphics, built atop its Hunyuan3D-2.0 large language model.
Most major Chinese internet companies have integrated DeepSeek’s economical AI model into their products and services. Tencent is among those who have gone the furthest, using DeepSeek to help power its search functions and WeChat/Weixin apps, according to Charlene Liu, an analyst at HSBC Holdings Plc.
“This open-minded approach should enhance Tencent’s monetization potential as it builds on its strong application development capability, large user base and unique Weixin ecosystem,” she wrote in a note. “AI is expected to solidify Weixin’s user stickiness” and help it capture more client ad spending.
Options traders are pricing in a 4.4% move in either direction for the shares after Wednesday’s results, compared with an average gain or drop of 2.2% following its past eight quarterly reports.
Rising valuations have raised some concerns for investors, even as Tencent’s stock performance has lagged that of some peers. It’s now trading at about 20 times forward earnings estimates, still above Alibaba’s 15 times and pulling closer to Meta Platforms Inc.’s 22 times.
“Pure optimism may not be sufficient to have further multiple expansion, Tencent needs to deliver numbers,” said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management. “Investors need Tencent to guide a close-to-double digit normalized growth, with margin expansion after an exceptional year in 2024.”
Still, the stock “may still have room to rerate” to its long-term earnings multiple of 23 times given the current round of stimulus and AI hype, according to Bao. “Tencent’s share price may reclaim its record high level if we are serious about China’s turnaround story for this cycle.”
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