Shares of electric carmaker Tesla (TSLA - Get Report) are on the rise on Tuesday and are close to completely recouping last month's post-earnings loss. The main reason for the boost is news that the company may finally be close to becoming a less risky investment. But is it time to speed into this stock?
Since its IPO, Tesla has been a risky bet for investors. The company is well known for big promises made by its visionary CEO, Elon Musk, but so far has struggled on delivering on those vows.
Besides the fact that Tesla has only managed to turn a profit in two quarters, one of the biggest complaints about the company is that it has historically fallen short in delivering the number of cars it promises to produce. In 2016, Tesla set a goal of 80,000 to 90,000 vehicles delivered by the end of the year. In reality, Tesla made it to only 76,230.
The company said it intends to help fix this underproduction problem by expanding its production facilities. Plans to double the size of its existing plant in Fremont, Calif., as well as the construction of a gargantuan Gigafactory in the Nevada desert have promise for increasing Tesla production, but they don't come without their own hefty prices.
By the time it's completed, Tesla's Gigafactory is estimated to have cost a whopping $5 billion.
Now, the company has been able to partly finance this massive build thanks to deals it has made such as selling transferable tax credits to MGM Resorts (MGM - Get Report) . But the company has still been forced to take on a good bit of debt. Nor did the controversial merger with SolarCity lighten the company's debt load--the deal added $3 billion.
On Tuesday, Tesla revealed that Chinese e-commerce giant Tencent Holdings (TCEHY) has purchased a 5% stake in Tesla, paying roughly $1.8 billion for 8.17 million shares. Tencent is now the fifth-largest Tesla shareholder ... but the Chinese company has big motives behind the purchase.
Along with rivals Alibaba (BABA - Get Report) and Baidu (BIDU - Get Report) , Tencent is one of the three largest conglomerates in China. And it has already announced plans to start selling autonomous electric cars. The company already owns a 10% stake in HERE, a company owned by a consortium of German automotive companies (Daimler (DDAIF) , Audi (AUDVF) and BMW (BAMXF) ) that provides mapping services for autonomous car systems.
Last year, sales in China accounted for more than 15% of Tesla's $7 billion total revenue. But the company could push even further into the country--right now, China is witnessing unprecedented luxury vehicle sales, and the government is offering generous rebates for the purchase of electric vehicles, making it the world's No. 1 market for these alternative fuel cars.
But not only will the Tencent purchase help Tesla sell more cars in Europe--it will help alleviate the company's liquidity issues. Tesla needs a ton of cash--not only to pay off its debts, but to help fund its ambitious projects and realize its car production goals.
This takes some of the pressure off Tesla--and some of the risk off its stock. Although it's not a safe play, by any means, investors with a long-term bullish outlook on electric, self-driving vehicles, as well as a stomach for a bit of risk, should watch for dips in share price to get in.
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