After deep adjustments by China's internet giants, Goldman Sachs still remains optimistic about these three major sectors

China’s internet sector has been under persistent pressure since the beginning of the year. After completing its earnings-season research, Goldman Sachs maintained a differentiated allocation strategy across its three major sub-industries, naming cloud computing and data centers as the top preference. It also upgraded e-commerce and travel to second place, while reiterating its ratings for the gaming and entertainment sector.

According to a report from the Chasing the Wind Trading Desk, in its latest report released on April 2, the Ronald Keung team at Goldman Sachs said that the current median price-to-earnings ratio for China’s internet sector is about 14x, while profit-growth expectations are trending toward a more moderate pace. Goldman Sachs believes that a sector earnings recovery and/or a narrative shift—such as a reassessment of the value of AI model/chip infrastructure, a reassessment of the valuations for overseas businesses, and shareholder returns—will be key to driving subsequent stock-price performance.

Goldman Sachs upgraded its ratings for the e-commerce and travel sub-sectors from fourth place to second place, because the valuations of the relevant individual stocks are at historical lows. It expects the profits of Alibaba, JD.com, and Didi to achieve a year-over-year recovery in the second half of 2026, which will support market confidence.

The report keeps cloud computing and data centers as the first-priority sub-sector. The core logic is the high growth certainty brought by the rapid expansion of AI Token demand. Gaming and entertainment are ranked third; the core logic is that AI-driven user time shifts toward leisure and entertainment, along with healthy growth in advertising revenue.

Cloud computing and data centers: Token breakout drives the preferred position

Goldman Sachs keeps cloud computing and data centers as the first-priority allocation within the sub-sector, with the core drivers being the sustained explosive growth in AI Token demand and the resulting improvement in cloud-service pricing power.

ByteDance recently announced that the daily average Token call volume over the past three months has doubled again to 100 billion calls (500 billion calls in December 2025), ranking among the global top three. Alibaba’s Bǎilián MaaS platform’s Token call volume increased by 6x over the same period. Goldman Sachs expects that Alibaba Cloud’s quarterly revenue growth rate in March 2026 will accelerate further from the previous quarter’s 36% to 40%. Alibaba management has also set the external-cloud and MaaS revenue compound annual growth target for the next five years at more than 40%.

From the perspective of capital expenditures, Goldman Sachs estimates that in 2026, the capital expenditures of China’s ultra-large cloud service providers will be about 58% of operating cash flow, while for U.S. peers of the same kind, that ratio averages 89%. Goldman Sachs estimates Alibaba’s FY2027 capital expenditures will be about RMB 180 billion, up 34% year over year; Tencent’s 2026 capital expenditures will be about RMB 100 billion, up 25%. Goldman Sachs believes that China’s ultra-large cloud service providers currently have operating cash flow plus net cash, which is sufficient to support the continued increase in capital expenditure to sustain competitiveness.

E-commerce and travel: Valuation trough offers upside potential

Goldman Sachs raised the e-commerce and travel sub-sectors from fourth place to second place significantly, with the core logic being that the valuation discount is clearly evident, combined with a marginal improvement in operating trends in the first quarter.

On valuations for the core stocks, PDD has a current expected P/E ratio for 2026 of about 9x. As of the end of 2025, it holds net cash of about $70 billion (including restricted cash). Full Truck Alliance’s P/E ratio, after excluding cash, is also in the mid-single digits. Goldman Sachs believes that PDD’s market value assigns almost no valuation to Temu. As Temu GMV moves toward the $100 billion target (Goldman Sachs estimate) and transaction-service revenue growth accelerates in 2026, there is significant re-rating potential.

For Alibaba, management expects the year-over-year growth rate of customer management revenue (CMR) in the March quarter to accelerate to above the high single digits (only 1% in the previous quarter). Goldman Sachs estimates that JD Retail’s year-over-year revenue growth rate in Q1 2026 will improve from -2% in the previous quarter to flat, and after digesting the comparison base from trade-in subsidies, it expects a gradual re-acceleration in the second half of 2026.

In terms of the competitive landscape in food delivery, Goldman Sachs believes that the State Administration for Market Regulation’s recent focus on the “anti-involution” theme will push subsidies in the delivery industry toward a more rational level, helping to improve the competitive structure. The report argues that, as Alibaba sets a clear goal of achieving profitability in its instant retail business within three years and with government regulation stepping in, the path for improving Meituan Delivery’s unit economics is relatively clear. Although the long-term profit level is lower than before compared with its competitive position, it remains on track.

Gaming and entertainment: AI catalyzes an upgrade in content consumption

Goldman Sachs slightly downgraded its rating for the gaming and entertainment sub-sector from second place to third place, but it still maintains an overall positive view, with the logic being that AI continues to shift users’ time toward leisure and entertainment, while advertising revenue maintains healthy growth.

In the gaming space, Apple recently announced that it will reduce the standard commission rate in China’s Mainland App Store from 30% to 25%. Google also announced that the standard in-app purchase commission in the Play Store will be reduced from 30% to 20%. Goldman Sachs believes these changes will lower channel costs for mobile game developers, expand profit margins, and help broaden the overall market size for mini-games (still maintaining year-over-year growth of more than 20%). Tencent, as a key operator, will be the primary beneficiary. Tencent’s Xiaoyuanzhou AI assistant is expected to be released in the second half of 2026, and Claw agent products are also being advanced rapidly. Goldman Sachs believes that these products will help Tencent transition from a “latecomer” of foundational models to an AI beneficiary of agents.

In entertainment content, backed by high-quality long-form video content and AI-related vertical ad placements, Bilibili is expected by Goldman Sachs to have advertising revenue growth of about 26% year over year in Q1 2026. Kuaishou’s advertising business faces dual pressure from reduced overseas advertising and e-commerce-related tax policy. Goldman Sachs expects Kuaishou’s full-year advertising growth in 2026 to fall to about 6%. Goldman Sachs views AI video generation tool Kling AI as a highlight for Kuaishou, and expects related revenue in 2026 to be about $356 million.

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