Tencent has just unveiled its Q2 2026 financial report. While I won't delve into the specifics of revenue and profit growth, as they are thoroughly detailed in the announcement, a couple of figures caught my attention after a cursory review:

Capital expenditure for this quarter soared to an astonishing RMB 52.784 billion, marking a 176% year-on-year increase and a 65% quarter-on-quarter surge. Is Tencent now the Chinese internet behemoth with the highest capital expenditure? That remains to be seen until Alibaba releases its financial report.

The impact of new AI products on Non-GAAP operating profit amounted to RMB 10.5 billion. This implies that in a single quarter, Tencent poured over RMB 10 billion in net investment into products such as Hunyuan, Yuanbao, WorkBuddy, CodeBuddy, and Xiaowei.

Tencent has finally taken the plunge it should have made over a year ago—heavily investing in AI. Of course, it's never too late, especially since AI has not yet posed a threat to Tencent's internet application ecosystem, which is built on social networking and gaming. The substantial investment in the past quarter has at least yielded immediate results: WorkBuddy has emerged as the most popular AI office application in China, without exception. According to third-party estimates, WorkBuddy's monthly active users on the PC side currently range between 20 and 30 million, although Tencent's management refrained from disclosing specific figures during the conference call.

WorkBuddy's success has prompted strategic shifts among competitors. Alibaba launched Qianwen Office, and ByteDance integrated Feishu into Doubao, among other moves. This underscores the significant and far-reaching influence WorkBuddy has had on the entire industry. However, it must be noted that this victory is currently isolated. Tencent has made some strides in foundational large models, but these advancements are far from being consolidated. Xiaowei has been in a grayscale release phase for over a month, with only a minuscule proportion of users having access. Meanwhile, Yuanbao does not even rank among the top four in C-end AI applications. While WorkBuddy has debunked the narrative that 'Tencent is not good at AI,' it has only marginally altered Tencent's overall strategic position in the AI landscape.

What accounts for WorkBuddy's success? I believe there are three key factors. First, the product is well-crafted, and Tencent's product manager culture has played a pivotal role. Second, its seamless integration with the WeChat ecosystem is likely the most crucial factor. A friend of mine once remarked, 'WorkBuddy combined with the WeChat ecosystem is unbeatable; it's hard for anyone in China to topple it.' Third, Tencent has invested heavily in channel promotion budgets. I suspect that more than half of the over RMB 10 billion incremental investment in the last quarter went into WorkBuddy.

During the earnings call, Tencent's management stressed, 'This round of AI-native business investments is primarily one-time and will continue until the end of this year to early next year, but it will not be sustained indefinitely.' In fact, excluding the incremental investment in new AI products, Tencent's year-on-year growth in Non-GAAP operating profit for this quarter would have been as high as 19%, which is quite remarkable given the current economic climate.

So, the question remains: Will the capital market applaud Tencent's 'all-in' on AI (increased capital expenditure and operating expenses)? It's worth noting that since Q2 2025, investors have been vocal about Tencent's perceived lack of investment in AI, lagging far behind Alibaba and ByteDance. This has been a significant factor constraining Tencent's market performance. However, in the past month or so, the tide has turned. From the United States to China, investors are increasingly valuing the cash flow of tech giants and are no longer as enthusiastic about stories of escalating capital expenditure, building data centers, and burning money on AI products. A year ago, big tech companies splurging on graphics cards was seen as a huge positive; the more they bought, the happier the capital market was. Now, things have become more nuanced. Google's experience after releasing its earnings report is a clear indicator of this shift.

Tencent's current predicament bears some resemblance to Google's: Rapidly rising capital expenditure has eaten into operating cash flow, resulting in a negative free cash flow for a single quarter. This situation also occurred at Alibaba last year (of course, Alibaba was also embroiled in the instant retail war). It's crucial to understand that the capital market's attitude towards tech giants has always been 'I want it all': robust growth in the main business, heavy investment in AI, and free cash flow for dividends and share buybacks. As long as the growth rate of capital expenditure outpaces that of operating cash flow, achieving all these goals simultaneously is impossible.

Had Tencent taken this approach three to four quarters ago, the capital market would have undoubtedly cheered, and perhaps it would have reached new heights long ago (of course, it would have also faced significant setbacks in July this year). The current situation is more complex because the capital market is experiencing weak confidence and highly divided expectations. No one knows whether investors currently prioritize free cash flow or the growth of AI businesses.

Regardless, I endorse Tencent's decision to increase its bets on the AI sector. No matter how the capital market performs tomorrow, it should not sway this decision, as it is currently the only correct one. Great companies should not succumb to short-term pressure from the capital market, especially not try to guess 'what the capital market wants today, tomorrow, or next year.' All companies that have attempted to do so have ceased to be great; I need not name names. This article has not received any funding or endorsement from Tencent or any of its competitors. The author currently does not hold any Tencent shares but may do so through funds or trust plans.