Chinese Internet giants' financial reports are approaching: AI and instant retail are burning cash, entering a profit vacuum in the third quarter?

Goldman Sachs pointed out that the upcoming third-quarter earnings season for Chinese internet giants will reveal a harsh reality: Although AI and cloud businesses bring growth highlights, the aggressive investments by major platforms in the "instant retail" sector are severely eroding profits.

According to the Chase Wind Trading Desk, on November 10, Goldman Sachs released a report stating that this could lead to a second consecutive quarter of profit decline in the Chinese internet sector, with the decline expected to widen from -9% in the second quarter to -31% in the third quarter (year-on-year).

Specifically, in the third quarter alone, the instant retail business is expected to incur massive losses of up to RMB 36 billion, RMB 20 billion, and RMB 13 billion for Alibaba, Meituan, and JD.com, respectively. Among these giants, Tencent is expected to be the only company to achieve year-on-year profit growth.

Therefore, the market's focus will no longer be on this quarter's profit figures, but rather on management's guidance regarding investment intensity and the path to narrowing losses for the fourth quarter and 2026. The accelerated growth of cloud business driven by AI is one of the few highlights, but this "future option" is being paid for by current profits.

For investors, this means enduring significant profit pressure in the short term. Investors need to closely monitor management's guidance on investment intensity for the second half of the year, especially regarding the monetization capability of AI and the path to narrowing losses in fast commerce. Short-term pain is inevitable, but the report suggests that third-quarter performance may become a key catalyst for a market sentiment shift towards a profit turning point in 2026.

Profit Vacuum, Focus on Profit Turning Point

Goldman Sachs expects that the third-quarter earnings reports of Chinese internet giants will present a "mixed bag." On one hand, the increase in capital expenditures due to AI investments and accelerated cloud revenue are common themes; on the other hand, aggressive investments in instant retail, overseas businesses, and new traffic entry points are temporarily affecting the overall profit margins of the groups.

The report predicts that the total profit of the Chinese internet sector in the quarter ending in September will decline significantly by 31% year-on-year, far exceeding the 9% decline in the June quarter. During this "vacuum period" of profitability, investor sentiment may come under pressure. The earnings conference call following the report release will be a key event for assessing the investment turning point. The market will closely watch whether losses in instant retail will narrow in the fourth quarter and the outlook for the profit turning point in 2026.

Burning Money for the Future, The Game of Capital Expenditure and Revenue Growth

AI is the core theme running through this season's earnings reports, but its impact on finances is twofold.

Positive Side: Cloud Business Significantly Accelerates. Benefiting from strong AI demand, Goldman Sachs expects Alibaba and Tencent's cloud revenue to further accelerate growth, similar to the logic behind the stock price increases of their American counterparts, Amazon and Google, after strong cloud business performance in their third-quarter reports. The report predicts that Alibaba's cloud business revenue growth in the third quarter will accelerate from 26% in the previous quarter to 31% year-on-year.

Negative Side: Surge in Capital Expenditure Erodes Profits. To support full-stack AI cloud services, the giants are "burning money" for large-scale AI infrastructure investments. Goldman Sachs' forecasts far exceed market expectations, predicting that Alibaba's capital expenditure for the fiscal years 2026-2028 will reach as high as RMB 460 billion, surpassing the company's previous target of RMB 380 billion The depreciation from these investments and the costs of AI inference will directly dilute short-term profits.

Although China's AI large models are continuously climbing in global rankings, consumer-facing AI applications (such as ByteDance's Doubao) are still in the profit dilution stage.

Instant retail is the main factor dragging down profits this quarter. Goldman Sachs clearly pointed out that related investments peaked in the third quarter, but the duration of losses may extend until 2026.

Staggering loss figures: The report estimates that in the third quarter alone, the instant retail business caused Alibaba to lose 36 billion yuan, Meituan to lose 20 billion yuan, and JD.com to lose 13 billion yuan. Compared to the second quarter, the losses for Alibaba and Meituan have sharply expanded.

Losses may persist: Although Goldman Sachs expects the losses in the fourth quarter to narrow quarter-on-quarter (with Alibaba, Meituan, and JD.com expected to narrow to 19 billion, 13 billion, and 13 billion yuan respectively), achieving the goal of halving losses at this stage still seems unlikely.

The most pressing question for investors is when this money-burning war will come to an end.

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