Tencent AI Strategy Charging Steady Ahead
Ad Revenue, Value-added Services, and the Unbeatable WeChat Ecosystem
Tencent announced its 2025Q1 earnings yesterday, and beat expectations all around. As we last wrote about and predicted, many things were aligned. Its consumer-facing AI strategy continues, WeChat’s integration of AI functions continues, and AI-empowered ad sales, value-added services, and gaming use-cases boosted its overall revenue.
On a macro level, despite investor concerns over Nvidia’s H20 ban, the company’s president said it holds a significant stockpile of AI chips that will protect it from U.S. restrictions, and mentioned the options existing in the Chinese domestic market going forward. However, he also added the caveat that the alternative software innovations should optimise chip efficiency (alluding to Huawei’s Ascend chips and the CANN software that is known to be more power hungry than Nvidia’s system).
Beating expectations, the growth was largely driven by strong performance in gaming and advertising, with both segments benefiting from AI enhancements. (I pulled out some interesting quotes from the earnings transcript, see below)
“During the first quarter of 2025, our high-quality revenue streams sustained their solid growth trajectory AI capabilities already contribute tangibly to business such as the performance advertising and evergreen games. We also stepped up our spending on new AI opportunities such as Yuanbao application and AI in Weixin. We believe the operating leverage from our existing high-quality revenue streams will help absorb the additional costs associated with these AI-related investments and contribute to healthy financial performance during this investment phase. We expect this strategic AI investment will create value for users and society and generate substantial incremental returns for us over the longer term.” — Pony (Huateng) Ma, Co-Founder, Chairman & CEO’s opening remarks.
Ramping AI Spending & Services
“AI capabilities already contributed tangibly to our businesses, such as performance advertising and evergreen games. We also stepped up our spending on new AI opportunities, such as the Yuanbao application and AI in Weixin,” Tencent’s earnings press release wrote.
Tencent said its capital expenditures for the first quarter totaled RMB 27.5 billion (~USD 3.75 billion), up 91% from the same period last year, and that the majority of that was continued investment into artificial intelligence-related functions/products/ infrastructure.
Key AI-related highlights that demonstrate the company’s future AI strategy: 1) Agentic AI; 2) AI in WeChat; 3) AI boosting ad and gaming; 4) Cloud
Agentic AI was a key focus as management said there will be two types of opportunities in this space. 1) One is the unique agentic AI that will be able to connect functionalities within WeChat’s ecosystem, such as information to assist in transactions and/or more use-cases. 2) The other is in general AI native products, such as its Yuanbao and IMA, which may be tweaked and further enhanced to be more similar to what Manus AI looks like.
“On the general agent AI, I think we are creating that capability within some of our AI native products such as Yuanbao and Ima, over time, as these AIs continue to evolve to increase in terms of their capability. So in the very beginning, these AIs actually answer questions very quickly. So those are the sort of quick response.
And then over time, they include -- they start including the chain of thoughts, a long thinking reasoning model and you can answer complicated questions. And over time, the capability can actually allow them to start doing more complicated tasks. So they start evolving to have Agentic capability, and they will be interacting with all other apps and programs and external APIs to help the users. So that would continue to evolve.” — Martin (Chi Ping) Lau, President of Tencent.
AI in WeChat: It was a big deal that WeChat integrated DeepSeek earlier in the year, completely changing the rules for AI consumer-facing monetization. Management said rolling out AI services within WeChat, such as integrating Yuanbao as a Weixin contact, and powering the search function with Hunyuan models and DeepSeek, and even adding in AI coding assistance for developers to reduce Mini Programs development time, will make WeChat much more competitive as well. I think this is huge. (see here why Tencent's integration of DeepSeek was such a big deal)
Source: Tencent Earnings Presentation AI investments: The company highlighted that integrating AI has boosted gaming and ad revenue, and the management expects operating leverage from existing business to help absorb the high AI spending. Specifically, AI could continue contributing to better ad recommendations, improved ad generation, and higher click-through rates. And for gaming, there are opportunities in AI deployment for content creation improvement and enhancement of the multiplayer game experience.
“Now at the same time, there's a sort of separate opportunity to deploy more generative AI into more content-driven games, and by doing so, perhaps, one would be able to facilitate initially faster creation of content by the game studio itself. And then over time, some degree of user-generated content, varying quality of experiences and ultimately, dynamically created content where the game itself is spinning up new environments if the players choose to venture off the preset map. But all of that is, I think, to be explored in the years ahead. And as of right now, the sort of bigger, more tangible opportunity is around utilizing what we'll call game artificial intelligence within the big competitive multiplayer games.” — James Gordon Mitchell, Chief Strategy Officer & Senior EVP.
Tencent Cloud has focused on "AI + Cloud” as its strategy, and cloud revenue saw slight growth. Still, it remains a lower priority for the company as a whole, especially compared to Alibaba, which is doubling down on cloud and AI infrastructure support for 2B clients.
Overall, Tencent is embracing AI with full speed. Its moat is in its walled-garden content (like Google with YouTube), but tapping into its over 1 billion MAUs on WeChat and building in AI-empowered functions is much more like Meta’s. Don’t forget what we wrote about before: its strength is also in WeChat’s functional adjacency in the chatbox user experience, and actually in its shoulder-shrug attitude to LLMs. Why try to compete on frontier models when you can just integrate DeepSeek?
Other related Tencent AI or China Big Tech articles for context:
Why Tencent's Integration of DeepSeek Into its AI App is a BIG DEAL
AI at the Speed of Light: Tencent WeChat's DeepSeek Integration
China's AI Application Super Powered: Open-Source Momentum Meets Super-App DNA
China’s ChatGPT Doubao shows that inference compute demand COULD actually go up by 1 billion times.
Grace, here is my take on this. Tencent’s steady, embedded AI strategy underscores a lesson more leaders are waking up to: the real future of AI isn’t general — it’s structural and domain-specific.
Horizontal LLMS provided us with a glimpse of their potential. But the real impact — the kind that drives margin, resilience, and differentiated capability — is coming from vertical integration. AI tuned to the shape, logic and tension points of specific industries, not just fine-tuned on datasets, but aligned to the business architechture itself.
We see it in Tencent’s gaming and ad platforms. Not as flashy announcements, but in how AI is embedded into the product, monetisation and operational infrastructure. That’s not just adoption — that’s absorption.
This is the lens we apply daily: not "how can AI impress," but where should it live inside a domain’s operating model? And whether that structure is ready to evolve with it.
Broad capability is exciting. But vertical coherence — that’s where the future competes.