This column originally appeared on March 28 on Real Money, our premium site for active traders. Click here to get great columns like this.
Since Tencent has said little about its $1.8 billion investment in Tesla Motors (TSLA) - Get Reportoutside of a boilerplate statement praising CEO Elon Musk's "vision, ambition, and execution," it's hard to presume much for now about what kind of alliance the Chinese messaging and gaming giant envisions having with Musk's company. But a look at the breadth of Tencent's empire, along with Tesla's ambitions within the Middle Kingdom, raises some interesting possibilities.
In an SEC filing published on Tuesday morning, Tencent disclosed it has bought 8.2 million Tesla shares, which is good for a 5% stake. Tesla rose 2.7% following the news to $277.45, putting shares about $10 below their February 14 peak. They've now fully recovered the late-February losses seen in response to Tesla's Q4 numbers and earnings call commentary.
The investment seems to have been made via open-market purchases, and thus won't have a direct impact on Tesla's balance sheet. But it's still a nice vote of confidence for a company that just two weeks ago announced it's raising $1.15 billion in stock and convertible notes to help finance a giant production ramp for its relatively cheap Model 3 sedan. Tesla is aiming to start volume production for the Model 3, which is believed to have seen over 400,000 reservations, in September.
Officially at least, Tesla still wants to produce 500,000 cars in 2018 and 1 million in 2019, up from just 83,922 in 2016. If it turns out that the company needs more cash to finance its ramp, Tencent, which had $12.2 billion in available-for-sale financial assets and $8.1 billion in term deposits at the end of 2016, could be a useful source.
Like fellow Chinese Internet giant Alibaba (BABA) - Get Report, which has made a string of investments in non-Chinese firms, Tencent may be looking to park some of its cash overseas. It might also see a big investment in a U.S. company as a good way to win favor in Washington. However, it's worth noting that while Tencent's platforms are supported by many American brands and game publishers within China, the company is believed to derive little revenue from the U.S.
On the other hand, Tencent and Tesla could certainly be of use to each other in China. The former's WeChat/Weixin mobile messaging, commerce and social media platform is all but ubiquitous within the country, and claimed 889 million monthly active users (MAUs) as of the end of 2016, up 28% annually. Tencent also operates the popular QQ (PC/mobile messaging) and Qzone (social networking) platforms, and its WeChat Pay service claims a duopoly in the Chinese mobile payments market with Alibaba/Ant Financial's Alipay.
Tesla, meanwhile, saw its Chinese sales triple last year to over $1 billion, or more than 15% of its total revenue. The company has 24 retail stores and 114 supercharger stations in the country, with more to come, and has benefited from the Chinese government's aggressive efforts to promote EV sales.
Tencent could promote Tesla's lineup within WeChat and other apps, while perhaps using its data to target affluent Chinese consumers who might be in the market for a Model 3 or Model S. It could also work with Tesla on using WeChat as a way to engage with current and potential customers. Tesla, meanwhile, could integrate WeChat's messaging and payment services with its infotainment system, 17-inch touchscreen and all, within cars sold in China.
Visa (V) - Get Report, Honda (HMC) - Get Report, General Motors (GM) - Get Report and others have already been experimenting with in-car payment solutions that can be used to pay for things like gas, parking and drive-thru orders. Tesla and Tencent could collaborate on something similar. In 2015, the latter held talks with Ford (F) - Get Reportabout a WeChat-related partnership, but no deal was announced. Around the same time, BMW said it would pre-install WeChat in its cars on its own.
For now, neither side has much to say about where an alliance between Tencent and Tesla could lead. Musk merely replied to this morning's disclosure with a tweet stating he's "glad to have Tencent as an investor and advisor to Tesla." But Tencent could easily become more than just that.