Seeing the subtle to know the profound: Observing the macro second derivative changes from Tencent and Alibaba

Recently, discussions about the rise of the East and the decline of the West have been rampant. After a rapid rebound in Hengke, the valuations of Chinese and American tech giants are almost indistinguishable, with the U.S. giants outperforming in terms of growth. Therefore, the core issue has returned to whether the macro economy can achieve sustained recovery, as both Tencent and Alibaba are reliant on the overall market!

If I were a "clue-tracking expert," what "improvement" and "deterioration" signals related to the Chinese macro environment could I observe from the Tencent Q4 2024 and Alibaba Q3 FY2025 (roughly aligned with natural quarters) financial reports and conference calls, as well as their outlook for the next quarter and future fiscal years?

Through these "micro observations," we can glimpse the subtle evolution of current market demand and macro atmosphere in China from the operational details of these two internet giants.

1. What "improvement" signals can be observed from subtle data changes?

① Recovery of consumer demand in e-commerce and payment sectors

Alibaba's domestic e-commerce (Taobao & Tmall) customer management revenue (CMR) increased by 9% year-on-year, with GMV rising and merchants' confidence recovering; overseas e-commerce also performed strongly, indicating a certain upward trend in cross-border consumption.

Tencent's commercial payment transaction volume continues to rise, with users' small and frequent payment habits strengthening, indicating a revival of offline and small scene consumption; the daily active users (DAU) and payment rates of the gaming business are also rising, with positive boosts from activities during peak seasons like the Spring Festival, reflecting a rebound in consumers' willingness to spend on entertainment.

Macro implication: Growth in both offline and online consumer demand, warming merchant investment willingness, and consumers are emerging from a spending slump on goods and entertainment.

② Strong demand for advertising investment, with social and content scenarios benefiting significantly

Tencent's Q4 video account advertising increased by 60% year-on-year, and WeChat search advertising doubled; Alibaba's CMR also increased by 9%, indicating that merchants are enhancing their advertising efforts.

Macro implication: Brand owners are more proactive in marketing promotions, and the advertising growth in e-commerce and social short videos serves as an important "barometer" for measuring consumer and industry confidence.

③ Increased demand for digital services

Tencent: Revenue from WeCom, Tencent Meeting, and other office collaboration SaaS has seen significant growth, indicating that corporate digital upgrades are still progressing steadily;

Alibaba: Revenue related to AI in cloud business continues to grow at triple-digit rates, with enterprises accelerating the adoption of AI.

Macro implication: Various industries are increasing investments in cloud and AI tools, reflecting a tendency for companies to improve operational efficiency and upgrade IT infrastructure in the post-pandemic era.

④ Overseas market demand remains strong

Tencent: International game overseas distribution is stable, with e-commerce investments in some European and Bay Area markets still showing positive growth;

Alibaba: Overseas e-commerce increased by 32% year-on-year, with increased investments in multiple regions to acquire users.

Macro implication: Consumer resilience in certain global regions, and Chinese companies still have opportunities in cross-border retail and gaming sectors.

2. What "deterioration" or pressure signals can be observed from the data

① Competition in the payment industry remains fierce

Tencent mentioned that merchant payment ASP is declining and fee rates are under pressure, maintaining overall low single-digit growth;

Macro implication: Although transaction volume is rising, the price war on the payment side has not eased, indicating that consumer recovery is still in its early stages, with companies competing to lower merchant-side fees to attract traffic.

② High CAPEX puts short-term pressure on free cash flow

Tencent: Q4 CAPEX surged (YoY +386%), short-term FCF down 87% YoY;

Alibaba: Also stated that investments in cloud + AI over the next three years will exceed the total of the past decade, leading to short-term dilution of FCF profits.

Macro implication: Although companies are optimistic about AI opportunities, the large resource investment and long payback period pose certain challenges to financial stability if the macro environment fluctuates.

③ Offline retail sector remains challenging

Alibaba continues to divest offline retail assets, reflecting that the operational pressure on traditional offline supermarkets and department stores has not fundamentally improved, with increased pressure from online competition.

Macro implication: The overall recovery speed of physical retail is slow, and the operational difficulties of large offline supermarkets persist.

To elaborate, based on the performance in January and February, the growth rate of online retail is still far better than offline. One reason is that many offline retailers are under increasing operational pressure, with traditional offline retailers like Hema, China Resources Vanguard, and Renrenle facing significant challenges, leading to frequent news of closures. This portion of consumer spending that has been squeezed out has shifted to online consumption. To some extent, the current recovery in e-commerce growth does not represent an overall recovery in social retail, and may even indicate that offline consumption in lower-tier cities is worse, potentially highlighting employment issues (such as small shops and family businesses being forced to close). Therefore, caution is needed for one to two more quarters.

According to the latest data, from January to February 2025, China's total retail sales of consumer goods reached 83,731 billion yuan, a year-on-year increase of 4.0%. Although this growth rate has improved compared to the same period last year, it still shows a weak overall consumption market. Specifically, retail sales of consumer goods excluding automobiles amounted to 76,838 billion yuan, growing by 4.8%, indicating that automobile consumption has a significant impact on overall retail sales.

Despite the weak performance of the overall consumption market, online retail has shown good growth momentum. From January to February 2025, the national online retail sales reached 22,763 billion yuan, a year-on-year increase of 7.3%. Among them, the online retail sales of physical goods were 18,633 billion yuan, growing by 5.0%, accounting for 22.3% of the total retail sales of consumer goods. This indicates that the proportion of online consumption in the overall retail market is gradually increasing.

Online growth does not represent an overall recovery in social retail; offline retail pressure may accelerate the shift to online.

From the performance in January and February this year, the growth rate of online retail is significantly better than offline, with major e-commerce platforms (Taobao, Pinduoduo, JD.com, etc.) showing relatively strong growth in their financial reports or operational data; In contrast, offline retail—especially traditional supermarkets (such as GaoXin Retail, China Resources Vanguard, Renrenle, etc.)—is facing significantly increased operational pressure, with continuous store closures or scale reductions.

Traditional retail formats, including large and medium-sized supermarkets, community couple stores, and small shops, are experiencing rising operating costs, declining foot traffic, and intense competition; there are frequent reports of "store closures" and "poor management." A portion of the originally offline consumption has been forced online due to store closures, boosting the data for e-commerce platforms.

Therefore, the positive online retail data is partly due to the structural reason of "demand shifting from offline to online," rather than a significant increase in overall consumer purchasing power; if we only look at the growth rate of e-commerce, it may be misjudged as a significant rebound in consumer willingness, but some offline areas (especially in third to sixth-tier cities) are experiencing even greater impacts, and consumption may continue to shrink.

Potential employment and economic concerns: Offline store closures mean job losses, especially for small couple stores and self-operated businesses that lack strong capital support; once they close, they face a cliff in income. This also negatively affects the local economy and community convenience consumption, as residents have fewer offline purchasing channels, further increasing reliance on online shopping. If this wave of store closures continues, it may lead to more unemployment issues, which is not conducive to the sustained recovery of macro consumption.

Therefore, I believe we need to observe for another 1 to 2 quarters:

The temporary rebound in online retail growth may have phase and structural factors, such as national subsidies, and we need to look at the overall social retail data for at least another 1 to 2 quarters; if offline retail continues to close stores and competition intensifies, it may indicate that physical consumption in third to sixth-tier cities remains weak, making it difficult to claim a strong reversal in overall social retail; at the same time, we need to pay attention to potential changes in employment and consumer confidence before determining whether macro demand is truly stabilizing and recovering.

Thus, the improved performance of e-commerce is to some extent driven by "the spillover of offline consumption," and currently does not necessarily represent a "significant recovery of overall social retail." In some regions, the deterioration of offline retail has led consumers to "passively" shift online, resulting in related job losses and social impacts. Continuous tracking of the degree of offline retail recovery and changes in overall resident consumption capacity over the next 1 to 2 quarters is needed to more comprehensively assess the true recovery situation of the domestic consumption market.

④ Uncertainty in regulatory and geopolitical environment

Although neither company extensively mentioned "regulatory fluctuations" in the minutes, there remains a cautious tone regarding issues such as game licensing, compliance in payment and fintech, and AI technology export restrictions;

Macro implication: Policy dividends are still not solid, and the industry still faces the possibility of further fluctuations.

III. Outlook for the next quarter and future fiscal year (Tencent vs. Alibaba)

Tencent Outlook:

Advertising: Scenarios such as Video Accounts, Mini Programs, and Search still have expansion potential, and Reels (AI dynamic recommendations) can continue to drive click-through improvements;

Gaming: Maintain old games and overseas launches, with multiple new titles in the pipeline; if the macro environment continues to warm, growth can remain steady;

Cloud and AI: Q4 CAPEX surged to lay out GPUs and data centers; as enterprise-side demand is released, we may see faster growth in cloud revenue next quarter, but sustained high CAPEX will suppress profits in the short term Overall attitude: Cautiously optimistic, expecting macro demand and corporate digitalization to progress simultaneously, with AI becoming a new engine for medium to long-term profits.

Alibaba Outlook:

E-commerce: Taobao & Tmall user activity is rebounding, GMV trends are positive, and a 9%-10% advertising growth rate can be sustained; AIDC is sprinting into overseas markets, potentially profitable in the next fiscal year;

Cloud and AI: Driven by the large model Qwen 2.5 Max and global multi-node layout, cloud business is accelerating expansion, but significant investment in AI infrastructure is dragging down FCF in the short term;

Core business focus: Divesting offline assets that do not align with strategy, concentrating on e-commerce, cloud, and various main internet platform businesses;

Overall attitude: Believes macro demand will continue to recover, with consumer and corporate IT spending maintaining steady growth, and AI will be a long-term growth focus.

Therefore:

"Improvement": E-commerce and social advertising are warming up, user consumption willingness is rising, corporate digitalization willingness is strengthening, and overseas markets remain vibrant;

"Under pressure": Payment rate competition remains fierce, large AI CAPEX is squeezing short-term cash flow, and offline retail performance is weak;

Regarding the macro environment: Both giants remain cautiously optimistic about the next quarter and the future, believing that with the implementation of AI technology and continued macro recovery, both consumer e-commerce and cloud AI services have considerable incremental space.

Industry and scenario level:

• Consumer: Demand for small, high-frequency payments is active, but commercial payments are still in price competition;

• Advertising: Strong growth in short videos and search ads reflects a rebound in merchant marketing investment;

• Enterprise services: The deep integration of AI and cloud is bringing a new wave of corporate digitalization;

• Retail side: Online acceleration and continued sluggishness in offline stores indicate that the recovery of physical retail is still relatively lagging.

In these "subtle changes" in data, we see that China's macro economy is slowly climbing along the tracks of consumption and digitalization, but it will take more time and policy support to achieve full prosperity.

For the next quarter and the next 1-2 fiscal years, both companies will focus on AI strategy and the recovery of core businesses, continuously investing high costs to seize opportunities and upgrading products and services to capture potential macro recovery dividends.

From a short-term perspective, Chinese internet companies are in the rebound phase from the trough, but risks such as basic consumption, offline retail, and payment rate competition still exist, making it impossible to assert that the "big picture" will definitely rebound strongly;

From a medium-term perspective, if China's macro consumption and corporate spending genuinely recover, the growth of core businesses such as Tencent, Alibaba, and JD may accelerate again, with room for valuation adjustments; if domestic economic recovery is delayed or policy uncertainty arises, it may lead to significant fluctuations.

In the long term, the "rise of the East and fall of the West" in the era of AI cannot be generalized, as there are many variables. It critically depends on each entity's core innovation capabilities and macro policy support.

Therefore, recent valuation comparisons show that the market value gap between leading Chinese internet companies and U.S. tech giants is narrowing, but in terms of "growth + profitability," U.S. companies still have an advantage; the narrative of "rise of the East and fall of the West" is not necessarily inevitable at this point, ultimately depending on whether the "macro economy continues to recover." Tencent, Alibaba, and other Chinese tech giants' short-term recovery relies more on the domestic market's rebound (consumption, advertising, corporate IT budgets, etc.), while US tech giants enjoy more stable or faster growth in areas like AI and global market layout; if China's macro environment, consumer demand, and policies continue to improve over the next few quarters, Chinese internet giants are expected to welcome a "true overall recovery," otherwise they may continue to maintain relatively cautious growth and valuation levels.

The Beauty of Bayesian, original title: "Seeing the Subtle: Understanding Macro Second Derivative Changes from Tencent and Alibaba"

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