"Big Banks" Bernstein: Tencent's valuation is under pressure as the market focuses on the lag in chatbot development

Bernstein published a report stating that the Chinese internet sector started off sluggishly in 2026, with the China Concept Internet Index flat year-to-date. Progress in AI continues to dominate relative preferences within the sector, with Alibaba (09988.HK) performing well due to the launch of its AI agent service Tongyi Qianwen, while Tencent (00700.HK) lagged behind.

The firm pointed out that the battle for chatbots is crucial, as top Chinese internet platforms resort to "red envelope" subsidies to drive chatbot adoption, supporting their view that in the consumer-facing AI space, model capability is only part of the success equation. Compared to the promotion of mobile payment wallets in 2015, they believe that distributing cash to drive "search behavior" is a rather roundabout way. It is best to reserve judgment until high-frequency data reveals user responses during and after the Spring Festival in the coming weeks. However, they also question when investors will start demanding more evidence of top-level traffic disruption. In any case, choosing AI stocks seems to be a safer stock-picking strategy than hoping for improvements in China's macro consumer growth.

The regulatory heat in the mainland industry remains higher than the level the firm would like to see, having previously mentioned a "yellow flag warning" in the regulatory cycle of the industry. Since then, Pinduoduo (PDD.US) and Trip.com (09961.HK) have both been investigated, and rumors about an increase in value-added tax (though debunked) have also exacerbated market sentiment volatility.

Regarding Tencent: the firm believes that its AI investment returns support growth, but the chatbot business still needs improvement. Tencent's stock performance year-to-date shows that investors are focused on AI models and chatbot development. They believe that the recent misstep with the "Yuanbao" red envelope incident reflects its internal dual-track AI development model. On the other hand, Tencent continues to provide robust AI investment returns (ROI) through its advertising and gaming businesses. Even assuming operational expenses are deleveraged, Tencent is currently trading at a forecasted price-to-earnings ratio of 14 to 15 for 2027, indicating a positive risk-reward for Tencent's stock price, as the company will eventually introduce more AI-driven services into its ecosystem with continued profit growth.

Bernstein noted that at the time of writing the report, Tencent's stock price had fallen about 8% year-to-date, reflecting a series of headwinds, and believes these challenges affect forward-looking valuation levels rather than earnings forecasts. Key factors include: (1) market concerns that Tencent is lagging in AI model and chatbot development; (2) Project Genie triggering a sell-off in global gaming stocks.

Between the two, the firm believes that criticism of Tencent's lag in AI model and chatbot development is reasonable, while the Project Genie factor reflects a naive view of the complexities of game development. Tencent's visual, image generation, and 3D object generation models performed well upon release, demonstrating the company's dominance in gaming and broader media content. It is one of the few companies globally to publicly release 3D world models. However, the Hunyuan Turbo S model ranked only seventh in February this year on LMArena (in this field, new models should typically rank first or at least close), and the company still appears absent from the public chatbot rankings The recent performance of the "Yuanbao Party" has been lackluster, seemingly reflecting the dual-track AI development both within and outside of WeChat.

In summary, Tencent's recent valuation downgrade is not without reason. However, the firm also recalls the case of Apple (AAPL.US), which returned to a market value level of $40,000, or stocks like Meta (META.US) that oscillate between "AI leaders" and "AI laggards." When the firm inquired with Tencent's management about clues to resolve the narrative headwinds from the current situation, they stated that Hunyuan 2.0 is the first model launched after the reorganization of the AI development team, and the speed of model iteration should accelerate thereafter. However, if the market's argument is that Tencent's valuation multiples will remain under pressure until AI model development is no longer a "show me the evidence" story, then based on the firm's estimates, the projected price-to-earnings ratio of 14 to 15 times for the next year is close to the bottom levels seen between 2022 and 2023, not far from the more severe challenges faced by the sector during that period, which the firm believes involved more serious and uncontrollable top-down (policy) resistance.

Tencent's stock price today (12th) is reported at 533 yuan, down 2.7%, with a trading volume of 17.73 billion yuan, having cumulatively dropped 11% since 2026