The Strategist

Why Tencent invests in Tesla

03/29/2017 - 15:25

Another major player entered a list of investors, ready to finance Tesla. Why did the Chinese Internet giant ignore the risks that all analysts are screaming about? And why did the company spend $ 1.8 billion on a stake in the start-up that does not meet expectations?

ChrisYunker via flickr
ChrisYunker via flickr
On Tuesday, when it became known that the Chinese Internet giant Tencent Holdings Ltd. bought a five percent stake in Tesla, shares of Elon Musk’s company jumped by 3.6%. Since then, there has been a slight correction, but now securities of Tesla are worth only 6% less than their record of daily trading.

Tencent’s appearance makes possible a variety of "bull" scenarios. Perhaps, the new shareholder will help the company sell cars in China, and maybe this will start a new technology partnership.

Not everything in this agreement can be explained by money. As we know, the most important issue of Tesla's survival is the company’s ability to finance Elon Musk’s ambitious plans with the help of an influx of new money. That is why Tesla has recently held the next issue of shares. This is the seventh time, according to Bloomberg’s estimates, and probably not the last one. After the recent rise in price, Tesla almost caught up with Ford in terms of market capitalization (despite the fact that Tesla sold 80 thousand cars last year and Ford - 6.65 million). If you take a corporate assessment, then Detroit is left behind.

"Tesla is a global pioneer in the field of new technologies", a spokesman for Tencent said on Tuesday. "Our success is partly based on the experience of supporting entrepreneurs with capital, and Elon Musk is a classic entrepreneur who can combine vision, ambition and project implementation."

So Tencent entered the stage. This fact is not going to change the situation at the root, but Ford and General Motors (and also oil companies) have more reasons for concern as the list of investors ready to finance Tesla, despite the risk, has been replenished by another major player.

Tencent’s market capitalization reaches $ 275 billion, which is almost twice as high as that of Tesla, Ford and GM combined. The company is known for huge volume of investments in various industries. Bloomberg reports that the giant has invested almost $ 20 billion in 50 companies only in the last year. The objects of investment are very different, from Indian trading platform Flipkart Online Services to rental bicycle startup Beijing Mobike Technology. And, judging by the latest company, Tencent does not expect a quick return.

Interestingly, on Tuesday morning, GM shares jumped even higher than Tesla. However, there has been a completely different situation as owner of hedge fund Greenlight Capital, David Einhorn, called on the company to issue an additional class of shares to raise the low price/earnings ratio. And, despite the fact that Tesla has already burned a bunch of fuel in its wild race, the supplies have not yet stopped.