Why did Tencent's stock price drop 6.8% despite significant revenue and profit growth?

On March 19, Tencent Holdings (00700.HK) opened sharply lower, dropping over 6% in the morning session. The decline continued in the afternoon, and by the close, the stock fell 6.8% to HKD 513. Tencent Music Entertainment (01698.HK) also declined significantly, closing down over 8% at HKD 41.1.

The previous day, Tencent released its full-year 2025 earnings, showing growth in both revenue and profit. Despite the positive performance, the stock price plunged, with Tencent’s AI investments becoming a “double-edged sword.”

Industry insiders believe Tencent’s results met expectations, but investors are concerned that increased AI investments may lead to reduced share buybacks. In the short term, the stock is expected to test the important support level of HKD 500, while the company’s medium- to long-term growth potential remains uncertain.

[Image source: Visual China]

Increased AI investment may lead to reduced share buybacks

Morgan Stanley and Goldman Sachs have lowered their forecasts

According to the earnings announcement, Tencent’s full-year 2025 revenue reached RMB 751.77 billion, up 14% year-over-year; Non-IFRS net profit was RMB 259.63 billion, up 17%.

Meanwhile, Tencent’s full-year capital expenditure reached RMB 79.2 billion, with R&D spending at RMB 85.75 billion, both hitting record highs.

In 2025, Tencent’s capital expenditures include investments in IT infrastructure, data centers, land use rights, office parks, and intellectual property. In the fourth quarter alone, RMB 19.6 billion was spent mainly on AI infrastructure. Tencent’s President, Liu Ciping, stated that in 2025, Tencent will invest RMB 18 billion in new AI products.

Liu Ciping also mentioned that due to constraints such as GPU (graphics processing unit) supply, the company’s capital expenditure did not meet expectations. If conditions permit, Tencent plans to increase capital spending and at least double investments in AI and models, which may lead to a reduction in share repurchases.

It was disclosed that in 2025, Tencent repurchased 153 million shares for a total of HKD 80 billion; in 2024, it repurchased 307 million shares for HKD 112 billion.

In response, Morgan Stanley issued a research report stating that Tencent is increasing investments in foundational models, new AI products, and GPUs. These upfront investments may pressure profit margins in the short term but could create new opportunities in the long run. The bank reaffirmed its “Overweight” rating, lowering the target price from HKD 735 to HKD 650.

Goldman Sachs, in its latest report, pointed out that Tencent is empowering its gaming and advertising businesses with AI while shifting toward an investment phase driven by new AI products. As a result, Goldman Sachs lowered its profit growth forecast for 2026, expecting adjusted net profit to grow 7% year-over-year, below the previous 10% estimate.

Wutong Research analyst Cen Zhiyong analyzed that Tencent’s management is prioritizing AI investments before considering further share buybacks. Investing in AI is a trend that relates to future growth potential, and Tencent’s strategy of allocating funds to future growth areas is the right choice. However, in the short term, investor focus may be on buybacks. With reduced buyback amounts, the stock price is likely to face pressure. The short-term support level is around HKD 500, while long-term prospects depend on future growth potential.

Core business shows positive signs

Industry competition raises concerns

Looking at individual segments, Tencent’s Value-Added Services (including gaming) revenue last year was RMB 369.28 billion, up 16%; social networking (including music, video, and live streaming) revenue was RMB 127.7 billion, up 5%; marketing services revenue was RMB 144.97 billion, up 19%; and fintech and enterprise services revenue was RMB 229.43 billion, up 8%.

According to Tencent Music’s earnings report, in 2025, Tencent Music’s revenue grew 15.8% year-over-year to RMB 32.9 billion, with net profit attributable to the parent increasing 66.4% to RMB 11.06 billion.

However, on March 18, Tencent Music’s Hong Kong stock price plummeted 21.8%, and today it continued to fall over 8%. JPMorgan has downgraded Tencent Music from “Overweight” to “Neutral,” lowering its target price from $30 to $12.

Tencent Music faces declining monthly active users and slowing growth in paying users. Meanwhile, ByteDance’s platforms, such as Soda Music and Tomato Music, are growing rapidly, impacting the market.

In Q4 2025, Tencent Music’s monthly active users decreased 5.0% year-over-year; paying users increased 5.3%, compared to 20.6% and 13.4% in Q4 2023 and Q4 2024, respectively.

Beyond the music sector, Tencent’s gaming and social businesses also face competition and risks. Whether AI investments can effectively enhance competitiveness remains uncertain.

Cheese Fund investment manager Pan Jun believes that Tencent’s sharp decline after earnings release, coupled with management’s announcement of reduced buybacks, weakens the previously highly certain stock support. For investors holding Tencent as a utility-like or high-dividend stock, this is a negative signal. Additionally, AI investments require heavy capital expenditure, raising concerns about profit margin dilution. In the context of aggressive AI investments by competitors like ByteDance, Alibaba, and Baidu, Tencent’s continued high buybacks while neglecting infrastructure upgrades could put it at a disadvantage in next-generation social and gaming battles.

(This article does not constitute investment advice. Please operate at your own risk.)

Editor: Tao Yueyang

Sources: Yicai, Daily Economic News, Jiemian News, Securities Times