The Chinese internet sector has remained under pressure since the beginning of the year. After completing its earnings season research, Goldman Sachs maintained its differentiated allocation strategy across three key sub-sectors, naming cloud computing and data centers as the top choice, upgrading e-commerce and travel to second place, and reaffirming the ratings for gaming and entertainment.
According to information from the Storm Chasing Trading Desk, the Ronald Keung team at Goldman Sachs stated in a report published on April 2 that the median price-to-earnings ratio of the Chinese internet sector is currently around 14 times, with profit growth expectations trending moderately. Goldman Sachs believes that either a recovery in sector profitability or a narrative shift—such as a revaluation of AI model/chip infrastructure value, overseas business valuation reassessment, and shareholder returns—will be crucial drivers of future stock performance.
Goldman Sachs upgraded the e-commerce and travel sub-sectors from fourth place to second place, citing historically low valuations of related stocks. It forecasted that Alibaba, JD.com, and Didi will achieve year-over-year profit recovery by the second half of 2026, which would bolster market confidence.
The report maintained cloud computing and data centers as the top-priority sub-sector, driven by strong growth certainty stemming from the rapid expansion of AI Token demand. Gaming and entertainment ranked third, supported by AI-driven user migration toward leisure activities and healthy advertising revenue growth.
Cloud Computing and Data Centers: Token Surge Drives Preferred Status
Goldman Sachs retained cloud computing and data centers as the top-priority allocation, driven primarily by the explosive growth in AI Token demand and the resulting improvement in cloud service pricing power.
ByteDance recently announced that its daily average Token usage had doubled again over the past three months to 100 billion calls (up from 50 billion in December 2025), ranking among the top three globally. Alibaba’s Model-as-a-Service platform, Bailian, achieved a sixfold increase in Token usage during the same period. Goldman Sachs expects Alibaba Cloud's revenue growth rate for the March 2026 quarter to accelerate further from 36% in the previous quarter to 40%. Alibaba management also set a compound annual growth target of over 40% for external cloud and MaaS revenues over the next five years.
From a capital expenditure perspective, Goldman Sachs estimates that by 2026, China's hyperscale cloud service providers will allocate approximately 58% of their operating cash flow to capital expenditures, compared to an average of 89% for similar companies in the United States. Goldman Sachs estimates$BABA-W (09988.HK)$FY2027 capital expenditure is expected to be approximately RMB 180 billion, representing a year-over-year increase of 34%;$TENCENT (00700.HK)$Capital expenditure for 2026 is projected to reach approximately RMB 1 trillion, reflecting a year-over-year growth of 25%. Goldman Sachs believes that the current operating cash flow plus net cash position of China’s hyperscale cloud service providers is sufficient to support continuously increasing capital expenditure to maintain competitiveness.
E-commerce and Travel: Undervaluation Offers Upside Potential
Goldman Sachs significantly upgraded the e-commerce and travel sub-sectors from fourth place to second place, driven by substantial valuation discounts and marginal improvements in first-quarter operating trends.
In terms of core valuation targets,$PDD Holdings (PDD.US)$The forward price-to-earnings ratio for 2026 currently stands at approximately 9x, with net cash holdings projected to reach about USD 70 billion (including restricted cash) by the end of 2025; $Full Truck Alliance (YMM.US)$(Full Truck Alliance) also trades at a mid-single-digit price-to-earnings ratio after deducting cash. Goldman Sachs notes that PDD Holdings' current market capitalization reflects minimal valuation attributed to Temu. Significant revaluation potential exists as transaction service revenue accelerates in 2026 and Temu’s GMV progresses toward the USD 100 billion target (as estimated by Goldman Sachs).
For$Alibaba (BABA.US)$Management expects customer management revenue (CMR) for the March quarter to accelerate to above the mid-single-digit range year-over-year (versus only 1% in the previous quarter). Goldman Sachs estimates that JD.com Retail’s year-over-year revenue growth for Q1 2026 will improve from -2% in the previous quarter to flat. The firm anticipates a gradual reacceleration in the second half of 2026 following the digestion of comparison bases related to trade-in subsidies.
Regarding competition dynamics in the food delivery sector, Goldman Sachs notes that recent attention from the State Administration for Market Regulation on the issue of "anti-internal competition" will drive subsidies in the food delivery industry toward rationality, improving competitive structures. The report highlights that Meituan’s path to improving unit economics in its food delivery business has become relatively clear, supported by Alibaba’s goal of achieving profitability in its instant retail operations within three years and government regulatory intervention, although long-term profit levels will remain lower than before the period of heightened competition.
Gaming and Entertainment: AI Drives Content Consumption Upgrade
Goldman Sachs slightly downgraded its rating for the gaming and entertainment sub-sector from second place to third place but maintained an overall positive outlook. The rationale lies in AI's continued push to shift user time toward leisure and entertainment, with advertising revenue showing healthy growth.
In the gaming sector, Apple recently announced a reduction in the standard commission rate for the App Store in mainland China from 30% to 25%, while Google also lowered its standard in-app purchase commission on the Play Store from 30% to 20%. Goldman Sachs believes these changes will reduce channel costs for mobile game developers, expand profit margins, and help broaden the overall mini-games market, which continues to grow at an annual rate of over 20%. Tencent, as a key operator, stands to benefit significantly. Tencent’s Xiaoyuzhou AI assistant is expected to launch in the second half of 2026, and Claw, its intelligent agent product, is advancing rapidly. Goldman Sachs views these products as catalysts for Tencent’s transition from being a "latecomer" in foundational models to becoming a beneficiary of intelligent agent AI.
In the entertainment content sector,$Bilibili (BILI.US)$Leveraging high-quality long-form video content and AI-driven vertical advertising placements, Goldman Sachs forecasts its Q1 2026 advertising revenue to grow by approximately 26% year-over-year.$KUAISHOU-W (01024.HK)$Advertising operations face dual pressures from reduced overseas ad spending and e-commerce-related tax policies. Goldman Sachs projects full-year 2026 advertising growth to decelerate to approximately 6%. Kling AI, Kuaishou’s AI-powered video generation tool, is highlighted as a key strength, with related revenue expected to reach approximately USD 356 million by 2026.
Editor/Melody