Tencent's Q3 performance exceeded expectations across the board, with strong growth in advertising and gaming businesses driven by AI. International gaming revenue surged 43% year-over-year, as AI technology transitions from the investment phase to the commercialization and harvest phase. Goldman Sachs analysis points out that despite a pullback in capital expenditures, the growing capabilities of AI models and sustained enterprise demand will make external AI and cloud services significant new growth drivers. Additionally, the company executed a large-scale share repurchase during the same period, demonstrating confidence, underscoring that AI has become a core new engine driving revenue and profit growth.
$TENCENT (00700.HK)$ The performance in the third quarter of 2025 was robust, surpassing market expectations across the board. AI is emerging as a core new driver of growth, significantly accelerating advertising revenue and empowering the cloud business to acquire more enterprise clients. Meanwhile, the gaming sector, particularly in international markets, has demonstrated explosive growth.
According to Storm Chaser Trading Desk, on November 13, Goldman Sachs released a report stating that the key takeaway from this earnings report for investors is: AI is no longer a distant narrative but is generating tangible revenue and profits for Tencent. The strong momentum of the two cash-cow businesses—advertising and gaming—combined with AI-driven efficiency improvements and monetization potential, is reshaping the company’s growth trajectory.
However, the report also highlighted a critical variable—the unexpected decline in capital expenditures, the future trend of which will be an important indicator for the market to assess Tencent’s commitment to AI infrastructure investment. At the same time, the company’s continued large-scale stock repurchases are signaling management’s confidence in the current share price.
Performance Exceeds Expectations Across the Board; AI Becomes New Growth Engine
Goldman Sachs noted that Tencent’s performance in the third quarter of 2025 was 'solid,' with revenue growing by 15% year-on-year, surpassing expectations, and adjusted operating profit increasing by 18% year-on-year to RMB 72.6 billion, largely in line with expectations. The core driver of this robust performance stems from the accelerated integration and application of AI technology across various business lines.
The report suggests that AI not only accelerated the growth of the advertising business but also injected new momentum into the cloud business, with increasing demand from enterprise clients for AI-related services. This indicates that Tencent’s AI strategy has transitioned from the investment phase to the commercialization and monetization phase.
Dual Drivers of Advertising and Gaming Propel Strong Growth Momentum
The most outstanding part of the earnings report was undoubtedly the two major business segments: advertising and gaming.
Advertising Business (Marketing Services): Driven by AI technology, revenue from this segment grew by 21% year-on-year to RMB 36.2 billion, surpassing the 20% growth rate seen in the first half of 2025. Goldman Sachs analysis attributes this primarily to robust demand in scenarios such as Video Accounts, mini-programs, and WeChat Search, as well as the introduction of the AIM+ automated ad placement solution, which has enhanced the efficiency and effectiveness of ad placements.
Online gaming business: This segment achieved an impressive year-on-year growth of 23%, with total revenue reaching RMB 63.6 billion, surpassing expectations. The growth momentum exhibited a dual-track breakout:
Domestic games: Year-on-year growth reached 15%, amounting to RMB 42.8 billion, demonstrating steady performance primarily driven by perennial products such as Honor of Kings and Peacekeeper Elite, as well as new releases like Valorant and Delta Force.
International games: Achieved a remarkable year-on-year growth of 43%, reaching RMB 20.8 billion, becoming the biggest highlight. This was mainly attributed to the robust growth of Supercell's games and contributions from newly acquired game studios.
Significant expansion in profit margins, with high-margin businesses making notable contributions
Driven by the rapid growth of high-margin businesses, Tencent's profitability significantly improved. According to the report, the company’s overall gross margin for Q3 reached 56.4%, up 3.3 percentage points year-on-year.
Goldman Sachs analysis indicates that the expansion in profit margins is primarily due to a shift in revenue structure towards higher-margin businesses. For instance, the gross margin of value-added services reached 61.2%, while marketing services’ gross margin stood at 56.7%. These high-margin revenues effectively offset the increased operating expenses incurred in AI-native application marketing and AI project research and development, ultimately driving a 1.0 percentage point year-on-year increase in adjusted operating profit margin.
Unexpected decline in capital expenditure draws attention to AI infrastructure outlook
Amidst high growth, one data point caught Goldman Sachs' particular attention. Tencent's capital expenditure in Q3 was RMB 13 billion, down from RMB 19.1 billion in Q2.
In its report, Goldman Sachs speculated that this quarter-on-quarter decline may be related to factors such as 'chip availability or computing equipment leasing.' This change has drawn market focus to Tencent’s future capital expenditure outlook. Against the backdrop of global and domestic peers ramping up investments in AI infrastructure competition, management’s perspective on AI cloud service opportunities and future capital investment plans will be critical for investors assessing its long-term AI competitiveness.
Despite the temporary pullback in capital expenditure, Goldman Sachs still believes that, bolstered by increasingly robust AI model capabilities and growing enterprise demand, external AI and cloud services will become a significant emerging growth driver for Tencent. Additionally, during Q3, the company continued executing stock repurchases totaling HKD 19.2 billion, steadfastly advancing towards its fiscal year 2025 target of at least HKD 80 billion in buybacks.
Editor/Doris
