Alibaba Group Holding and Tencent Holdings reported quarterly earnings within hours of each other on May 13, and both missed revenue expectations. Both saw their US-traded shares rise anyway. The market’s willingness to reward deteriorating headline numbers points to a shared question that now dominates both investment cases: when does AI spending convert into AI revenue? Both companies have been spending aggressively. Neither has fully answered the question. But on the same day, they offered strikingly different frameworks for how the conversion would happen.
Alibaba focuses on selling. Poe Zhao notes that the company’s CEO Eddie Wu disclosed two AI metrics for the first time. AI-related cloud product revenue now annualizes above 35.8 billion yuan, accounting for 30% of the Cloud Intelligence Group’s external revenue. Separately, the narrower model-and-application-services (MaaS) ARR had already exceeded 8 billion yuan, is expected to surpass 10 billion yuan in the June quarter, and is on track to exceed 30 billion yuan by year-end. Cloud external revenue grew 40%. Wu told analysts that not a single AI card on Alibaba’s servers sits idle. “I can tell you that today there isn’t a single card on our service that is idle,” he said. JPMorgan head of China equity research Alex Yao noted that Alibaba’s cloud is “currently supply-constrained,” meaning “realized growth is a function of capex pace, not demand.”
Tencent focuses on building. The company’s Chief Strategy Officer James Mitchell told analysts that the company had “consciously” delayed monetizing AI through Tencent Cloud because it prioritized a “multiplicity of internal services” over external sales. GPU capacity went to Hunyuan model training, advertising optimization, agent development for WeChat, and productivity tools. Tencent Cloud’s AI agent solutions are already generating initial token monetization, but external cloud has not been the primary allocation priority. The difference is sequencing: which company exposes scarce compute to external revenue first.
The Capex Race and the Chip Constraint
Both companies are doubling down on capital expenditure, and both are betting that Chinese-made chips will break the supply bottlenecks stifling their ambitions. Alibaba CEO Wu said the company was likely to “overshoot” its original capex target of 380 billion yuan over three years to fund AI data center buildout. The company’s March quarter capex reached 27 billion yuan, slightly down from the previous quarter’s 29 billion yuan.
Tencent reported a sharper surge, with first-quarter capex reaching 31.9 billion yuan — up 63% from the previous quarter. Mitchell pledged “a substantial increase” in 2026 capex, especially in the second half, as more China-designed AI chips become available. Goldman Sachs forecast Tencent’s capex to hit 165 billion yuan in 2027, more than double its 2025 levels.
Chip supply does not explain everything, but it determines the sequence each company can afford. Both face the same binding constraint: the number of AI chips they can source shapes what they can do, and in what order. Chinese tech giants including Alibaba, Tencent, and ByteDance are snapping up Huawei’s latest AI processor, the Ascend 950PR, which entered mass production in April. Alibaba has proprietary chips from its T-Head subsidiary, with 60% of that capacity already serving external customers. Wu said the new chips “will certainly contribute very significantly to gross margin expansion.” Tencent does not operate a comparable in-house AI chip business but has more internal surfaces where AI can improve ads, games, and productivity tools.
The Cost of the Arms Race
The heavy spending comes at a cost. Alibaba’s adjusted EBITDA plunged 84% year on year, dragged by heavy AI investments. Free cash flow swung from a 3.7 billion yuan inflow a year earlier to a 17.3 billion yuan outflow. Its US-listed shares gained 8.2%. Tencent reported its slowest revenue growth in six quarters, at 9% year over year. Its US stock climbed nearly 5%.
Early returns are surfacing, however. Alibaba saw triple-digit growth in quarterly AI product revenue, while Tencent attributed a 20% revenue jump in marketing services to AI-driven ad tech. Citi forecasts that Alibaba Cloud’s AI revenue could grow 90% annually to hit 585.5 billion yuan by FY2031, a projection that would require the current momentum to be sustained for several years.
The arms race extends beyond these two. ByteDance is boosting its planned capex to over 200 billion yuan, with a significant allocation for domestic chips. While Chinese giants collectively spent 400 billion yuan on AI last year, according to UBS analyst Wei Xiong, US peers like Google and Microsoft were forecasting annual capex of approximately $190 billion, and Meta Platforms raised its estimates to $145 billion. China’s AI investment remains a fraction of the West’s in absolute terms, even as the pace of growth is comparable.
The H200 Question Hangs Over Both Companies
Both Alibaba and Tencent are among the approximately 10 Chinese companies that have received US Commerce Department authorization to purchase Nvidia H200 chips, with individual purchase caps set at 75,000 chips per approved buyer. Neither company responded to requests for comment on the Reuters report confirming the approvals, according to the SCMP. No deliveries have been made: transactions froze after Chinese companies backed away following direction from Beijing, which is reluctant to deepen dependence on American hardware.
The H200 deadlock means that both Alibaba and Tencent are building their AI infrastructure primarily around domestic alternatives, a constraint that is shaping their strategies in ways that will be difficult to reverse even if the diplomatic situation changes. For Alibaba, which is already monetizing its compute externally, the domestic chip bet is a commercial decision as much as a political one. For Tencent, which is still in the internal deployment phase, the bet is on the premise that domestic supply will loosen in the second half of 2026 and allow it to shift to external monetization at scale.
Whether that sequencing plays out as planned will be one of the defining questions for China’s AI industry in the second half of this year.