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Tencent has undergone a notable transformation, a change that has been felt throughout the tech industry and among investors alikeTraditionally viewed as a company that adhered to a ‘Buddhist’ or nonchalant approach, particularly during the past two tumultuous years of AI development, Tencent has been somewhat hesitant to participate aggressively in the so-called AI arms race ignited by the rapid advancements stemming from technologies like ChatGPT.
As of May 2023, amidst an industry embroiled in what was termed the "Battle of the Hundred Models," the chairman and CEO of Tencent, Ma Huateng, conveyed a rather philosophical perspective to shareholdersHe indicated that Tencent was in no rush to present unfinished products, likening the situation to the caution one must exercise in an industrial revolution—a month’s head start on showcasing a light bulb isn't particularly impactful when viewed in the grand scheme of time.
This philosophy translated into Tencent's slower pace in launching its AI products compared to its competitorsNew developments, such as the hybrid model and the AI assistant known as Yuanbao, reflected Tencent’s more deliberate approach.
However, this cautious demeanor shifted dramatically in a matter of weeks as Tencent responded to the rise of DeepSeek, an innovative player in the AI landscapeIn the past month alone, more than ten Tencent products spanning various business segments have integrated with DeepSeek, indicating a clear directive from the upper echelons of the company.
The financial markets positively responded to this shift in strategyAs of February 18, 2024, Tencent's share price soared to 513 Hong Kong dollars, marking a peak not seen since August 2021. Meanwhile, analysts began to reassess Tencent’s position amid global capital markets that were reevaluating Chinese assets.
With the advent of DeepSeek’s R1 model, international investment banks began to reevaluate Tencent
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A report published by UBS noted that average stock prices for AI-related Chinese companies climbed by 15%, suggesting a potential rebound in the market previously overshadowed by uncertaintiesUBS calculated Tencent’s valuation at approximately 45% discount compared to peers like Meta, emphasizing that the company remained undervalued.
On February 13, the same firm highlighted how the market might be significantly underestimating Tencent's potential in AI, particularly emphasizing the synergistic effects that could arise from combining DeepSeek with WeChatUBS reasoned that despite Tencent's slower rollout of large language models compared to competitors, its massive datasets, extensive user base, high-quality content, and a myriad of application scenarios within the WeChat ecosystem constituted an underestimated advantage.
Goldman Sachs voiced similar sentiments, suggesting that WeChat, one of the most prominent super applications, could leverage social data and transaction capabilities to harness AI’s full potentialThe integration of social instant messaging features, media content, and closed-loop transaction systems would uniquely position WeChat to deploy an effective AI assistant.
As a result, Goldman Sachs raised its price target for Tencent shares to 534 Hong Kong dollars, while UBS adjusted its target to 593 Hong Kong dollars, indicating over a 20% upside potential from Tencent's current trading price of 486 Hong Kong dollars.
Moreover, Morgan Stanley’s strategic analyst, Gary Yu, emphasized that breakthroughs in AI consumer applications would likely catalyze a surge in Tencent's stock priceYu noted the shift from focusing solely on the capabilities of large-scale language models (LLMs) to practical applications and monetization would benefit Tencent significantly as it had already begun to reap rewards from AI-driven advertising technologyHe predicted that the consumer-oriented market (ToC) could outpace the enterprise-oriented market (ToB) in China.
Analysts concurred that enhanced technical capabilities and a growing range of application scenarios could sustain continuous growth for Tencent and reshape its business model
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Additionally, ongoing progress in stock buybacks and the evolving landscape of mini-program e-commerce could serve as vital catalysts for increasing share prices.
The convergence of DeepSeek with WeChat marked what many consider the dawn of a new era in AI paradigms, with Tencent positioned prominently at the forefront of this transformation.
In response to the market's renewed interest and the rapid evolution of AI technology, Tencent, too, began to pivot dramatically, showcasing an increasingly aggressive strategy toward embracing AIEarly in January, well before DeepSeek launched its R1 model, Tencent conducted an organizational shuffle that many were unaware ofThe entirety of the Yuanbao team transitioned from the Technology and Engineering Group (TEG) to the Cloud and Industry Group (CSIG).
The industry trend over the past two years had been what’s known as “model-aiding integration.” However, as model capabilities matured and iteration sped up, a consensus emerged in the industry that separating model teams from application teams was becoming essentialAlibaba had set a precedent for this shift, merging its Tongyi application team into its Alibaba Intelligent Information Group ahead of Tencent.
This structural alteration laid the groundwork for Yuanbao to integrate swiftly with DeepSeek, a foresight Tencent had already anticipated for 2025, aiming for greater productization of its large modelsInternally, Ma Huateng articulated his commitment to resource allocation geared toward computational power, urging all business groups to embrace large model scenarios across products ranging from WeChat and QQ to search engines and various Tencent services.
While Tencent had initially allowed its in-house products to explore AI through hybrid models, the emergence of DeepSeek compelled its strategy to accelerate significantlyAn insider in the large model industry relayed to reporters that, "the capabilities of the models dictate the product experience, but Tencent found itself with limited options at that point." The disruptive capabilities presented by DeepSeek opened up new avenues to elevate the foundational model structure for Tencent.
DeepSeek’s commitment to high performance, low costs, and a fully open-source model aligns closely with Tencent’s intentions of nurturing the broader ecosystem
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With Tencent, an advocate for model open-sourcing, having preemptively released numerous internal models, their approach underscores a prevailing emphasis on fostering a rich application ecosystem—explaining their agile response to DeepSeek's market entry.
From the rapid launch of DeepSeek-R1 on Tencent Cloud on February 2 to Yuanbao's simultaneous support for both hybrid and DeepSeek models by February 13, and the comprehensive embrace of DeepSeek-R1 across Tencent’s product lines led by WeChat shortly thereafter, the company illustrated decisive actions—a precursor to large models transitioning into viable applications.
Concurrently, Tencent adapted its organizational structure promptlyFollowing Yuanbao’s integration into CSIG, further product lines such as the QQ Browser, Sogou Input Method, and IM applications followed suit, collectively contributing to a new AI framework aimed at mastering large model applications.
This rapid upgrade in product capabilities, coupled with agile organizational adjustments, showcased Tencent's assertive AI strategyAs DeepSeek democratizes AI technologies, all companies find themselves on a level playing field, spotlighting the competition revolving around data resources, product development, and user experiences—domains where Tencent excels.
Tencent's unmatched scale of consumer users and diverse product offerings are expected to propel trials of large models, potentially uncovering new AI application experiences beyond traditional Q&A formatsAnalysts from Huatai Securities believe that Tencent's proactive AI application development will usher in a period of accelerated growth across the industry, projecting that China’s AI applications are poised to enter a new phase of mass deployment by 2025.
Clearly, DeepSeek has helped Tencent stretch the boundaries of imagination concerning AI applications, generating substantial valuation growth opportunitiesAdditionally, Tencent’s potential in multimodal model capabilities merits attention as DeepSeek has yet to unveil this component, whilst the domestic landscape remains highly competitive among tech giants.
An insider remarked about the significant data accumulation by both Tencent and ByteDance in multimodal contexts; should the foundational models advance to a threshold requiring substantial investments, then multimodal capabilities may become a strategic opportunity for these companies.
Another critical aspect to consider is that despite the reduced usage costs of large models, they still represent a capital-intensive business model
Tencent's foundational stability ensures a robust trajectory for future growthWhile Tencent encountered a growth plateau in 2022, with consecutive quarters of declining net profits, proactive measures led to renewed growth momentum, with the company returning to an upward trajectory.
A familiar figure within Tencent shared insights on the company's rigorous cost-management approach amidst industry-wide optimization effortsAlthough this overhaul led to short-term pains, including project optimizations, it ultimately bolstered the quality of revenue streams.
By the third quarter of 2024, Tencent reported revenue of 167.193 billion yuan, reflecting an 8% year-on-year growth alongside a non-IFRS net profit of 59.813 billion yuan, surging by 33%. For Tencent, the profit metric serves as a reflection of revenue quality, where consistent profit growth outpacing revenue growth aligns ideally with Tencent’s current aspirations.
Moreover, all three principal segments of Tencent—Value-Added Services, Marketing Services, and Financial Technology & Enterprise Services—experienced growth, with the previously declining domestic gaming sector returning to a double-digit growth trajectory by the third quarterEntering 2025, Tencent’s gaming performance is forecasted to stand outData from SensorTower illustrates a rise in mobile game revenues in the Chinese App Store in January.
Additionally, Tencent has been nurturing emerging ventures cultivated within the WeChat ecosystem, such as WeChat Stores and mini-programs, which have started contributing positively to Tencent’s financial performance.
Underlying shifts in Tencent's foundational dynamics have become apparent in Ma Huateng's internal remarksDuring Tencent's downturn, Ma had resolutely detailed the need to 'weather the storm,' and critiqued multiple business segmentsYet in early 2025, his comments shifted markedly towards encouragementSummarizing 2024, Ma reflected on a strategy of "stability with improvement," and on looking to 2025, he expressed hopes for growth visibility and skill cultivation, promising a "fruitful year ahead." Presently, Tencent has achieved remarkable outcomes, indicative of this optimistic forecast.
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