Tencent, a Chinese Tech Company, Just Bought a 5% Stake in Tesla

Tesla Tencent

Tesla ($TSLA) is the most well-known electric car manufacturer in the world. They produce the best-selling plug-in electric vehicle (Tesla Model S), are a leading supplier in renewable/alternative energy sources, and have an overly enthusiastic customer base that will buy pretty much any model the company puts out.

Tesla, however, is not profitable. After buying Solar City, a solar power company owned by Tesla Founder/CEO Elon Musk, the company took on a large amount of debt. Tesla also wants to release a less expensive, mass-market electric vehicle — the Model 3, but they don’t have all the money to put their new car into production.

To raise money for the Model 3 and future products, Tesla decided to take on loans and sell more stock in their company. Before they could release more shares, they received a lucrative offer from Tencent, a tech-focused Chinese holding company. Not only does this deal give Tesla more money, it also opens numerous opportunities for the company’s operations in China.

But what does a 5% stake in Tesla get Tencent, and why did they invest in the first place?

Tencent is a multi-billion-dollar company that owns everything from internet properties to video games.

Tencent owns WeChat, a chat and payment app used by nearly 900 million people. They also own QQ.com, a massively popular website like Yahoo. Tesla makes significant investments in websites, e-commerce platforms, and even game developers. In February of 2011, the company purchased Riot Games, makers of the super-popular League of Legends game, for $230 million. They also own a handful of popular mobile game developers, too.

Tencent purchased 5% of Tesla for $1.78 billion.

Tencent’s investment in Tesla makes them a minority shareholder, as the bulk of Tesla shares are owned by private shareholders. The $1.78 billion, however, means they will likely get significant input on Tesla’s operations in China. This also gives them 8.2 million shares in the company, which can increase in value over time (just like public shares of stock). In return, Tesla gets to use that $1.78 billion to start building their Model 3 vehicles, while also paying down debt.

Tesla really wants to sell Model 3 vehicles as soon as possible.

The company feels the Model 3 will help them achieve their goal of profitability and remain the leader in the electric car space. With a price of $35,000 per vehicle (before tax incentives), purchasing a Model 3 not only makes it an affordable electric vehicle, but it’s also as affordable as a standard hybrid, too. This price could push drivers looking to buy a hybrid to consider Tesla’s options instead.

Making the Model 3, however, is a costly endeavor, and Tesla is strapped for cash. By accepting Tencent’s $1.78 billion and raising more money, Tesla could build the Model 3 sooner rather than later. Tencent could help expand Tesla’s reach and market the vehicle in China, where the latter already has a small presence.

Investors are mostly positive on Tencent’s investment.

Shares of Tesla increased in value when both companies broke the news. This is because Tesla is now much closer to manufacturing their new vehicle. Tesla, however, has yet to turn a profit, which leads some investors to believe it’s not a good investment. After all, if they’re raising money but losing money in the end, how can they continue to operate in the future?

Should you invest in Tesla or Tencent? Both companies are publicly traded (Tencent trades as $0700 on the Hong Kong Stock Exchange). Tencent’s stock increased by 43.76% in the last year, and Tesla by 19.93% in the same period. Yet Tencent makes oodles of money and rakes in profit, unlike their new investment.

If you think Tencent’s investment in Tesla and the Model 3 will help the electric car company, be sure to do your research before you invest. If you think Tesla is far from profitability and $1.78 billion won’t help them, you might want to invest elsewhere.