China Internet 2026: Under Pressure From ByteDance, Major Players Launch Full‑Scale Contest For AI Entry Points

Goldman Sachs projects 2026 as a strategic inflection year for China’s internet conglomerates, during which firms will intensify consumer‑facing AI investments, compete to establish dominant “AI super entry points,” and concentrate resources on defending their core market positions. The latest research from Ronald Keung’s team at Goldman Sachs argues that the year will be defined by two parallel dynamics: accelerated AI spending and vigorous protection of market leadership. ByteDance’s disruptive advances across AI, e‑commerce and local services are compelling incumbents such as Alibaba and Tencent to execute broad strategic pivots, increasing AI‑to‑consumer investment and capital expenditure while shoring up their primary franchises. In this environment, the industry’s performance drivers will shift from broad multiple expansion to a focus on earnings growth, globalization narratives and shareholder returns.

Goldman Sachs identifies Pinduoduo as its preferred pick for 2026. The firm highlights Pinduoduo’s 10x 2026 EP/E as materially below the sector median of 18x, and notes that Temu’s approaching profitability inflection, the company’s AI application potential and its entrenched value proposition in lower‑tier domestic markets create meaningful re‑rating upside. Alibaba, with a full‑stack AI strategy, and Tencent, as a principal beneficiary of AI application adoption, remain core long‑term allocations over a one‑to‑three‑year horizon.

The industry turning point in 2026 is driven fundamentally by ByteDance’s multi‑front breakthroughs, which have altered competitive dynamics. As the most profitable Chinese internet company in 2025—reporting USD 50 billion in earnings, well ahead of Tencent’s USD 36 billion and Alibaba’s USD 15 billion—ByteDance’s advances have rewritten the rules of engagement. On the consumer AI front, ByteDance’s Doubao app has exceeded 100 million daily active users, consuming roughly 50 trillion tokens per day and ranking third globally; its planned collaboration with the 2026 Spring Festival Gala is expected to further expand reach. At the model level, releases such as Doubao‑Seed‑1.8 and the video generation model Seedance1.5Pro underscore ByteDance’s multimodal capabilities. In e‑commerce, Douyin’s GMV grew by more than 30% year‑on‑year and has entered the industry’s top three, with expectations to surpass Pinduoduo in 2026. In local services, ByteDance’s in‑store business has reached a GTV of RMB 800 billion, posing a direct challenge to Meituan’s leadership.

Confronted with ByteDance’s momentum, Alibaba, Tencent and other incumbents are executing strategic pivots. Collectively, ByteDance, Alibaba and Tencent are expected to allocate over USD 60 billion (approximately RMB 410 billion) in AI capital expenditure in 2026, prioritizing consumer AI entry points and full‑stack technology. Concurrently, these firms are reinforcing their core positions: Alibaba is consolidating its e‑commerce GMV leadership, Meituan is strengthening its local services franchise, and Tencent is accelerating deployment of AI agent capabilities within WeChat while exploring social AI use cases in QQ. Competitive dynamics in areas such as food delivery are becoming less destructive, with unit economics showing marked improvement.

AI now serves as the principal engine reshaping the sector. Goldman Sachs outlines six AI‑centric themes that will reconfigure the ecosystem in 2026, spanning technical breakthroughs, application deployment and globalization. Advertising is shifting toward ROI‑driven formats, with platforms accelerating penetration of AI‑enabled ad products and advertisers adopting combined strategies to secure visibility in AI contexts. Model competition is intensifying around long‑context capabilities, multimodality, 3D world models and cost‑efficient architectures, with ByteDance and Alibaba positioned as leaders in multimodal development and with initiatives such as map‑based world models and real‑time world models advancing physical AI and robotics use cases. Consumer AI entry points are set to proliferate, marking 2026 as the inaugural year for mass‑market AI super entry points; offerings from ByteDance, Alibaba and Tencent will compete to become primary user interfaces, and while inference costs may rise initially, long‑term monetization via advertising and commissions could alter multi‑app usage patterns. The China‑U.S. AI competition will hinge on next‑generation chip access, where differences in inference performance and infrastructure create strategic advantages. Chinese AI models are expected to adopt hybrid open‑source and closed‑source commercialization approaches, with top models monetized through subscriptions and APIs while coding and multimodal models leverage cost and speed advantages to expand globally. Finally, surging To‑C and To‑B AI demand will drive rapid growth in inference workloads and token consumption, prompting substantial cloud and data‑center investment; Alibaba Cloud is projected to sustain growth above 30%, and data‑center operators such as GDS and VNET stand to benefit from rising order flow.

Goldman Sachs recommends an investment framework that abandons broad market‑wide assumptions in favor of selective alpha generation. The firm emphasizes three thematic priorities: earnings per share delivery and growth, AI and globalization re‑rating potential, and shareholder returns. Within this framework, cloud and data centers, gaming and entertainment, and AI model developers are identified as top sub‑sectors. Targets for EPS improvement include companies benefiting from order recovery, rationalized competition and margin expansion—data‑center operators and e‑commerce and local‑service platforms with narrowing losses are highlighted. For narrative‑driven opportunities, the focus is on firms with demonstrable AI model advantages and credible overseas expansion plans; examples include video‑generation model leaders and companies that can unlock value through strategic asset separations. Finally, shareholder‑return considerations favor firms with robust cash generation and explicit capital‑return policies, including those with ample net cash and potential for dividend enhancement.