Until last year, China had been Tesla Inc’s (NASDAQ:TSLA) “White Whale,” a coveted beast that had repeatedly eluded Elon Musk’s otherwise fast-growing company.
But sales in the world’s most populous country tripled last year, and could theoretically accelerate even more now that one of China’s largest internet entities has bought a 5% stake in TSLA stock.
Tencent Holdings Ltd (OTCMKTS:TCEHY) paid $1.78 billion for its relatively small stake (it’s now the fifth-largest shareholder) in the luxury electric car maker.
But the impact on Tesla, and TSLA stock, could be big.
Tencent has enough clout to help move the needle for Tesla sales in China, and the timing couldn’t be better with Tesla set to launch the Model 3, its first “affordable” electric car, later this year.
China Next Frontier for TSLA Stock Growth
Last year, Tesla’s China revenue topped $1 billion for the first time, accounting for more than 15% of the company’s total sales. That’s good, but there’s plenty of room for improvement. Slow deliveries and a lack of charging stations contributed to a slow 2015 in China; sales fell by about a third that year. Sales bounced back emphatically last year, in part because TSLA added 57 new stores worldwide and 200-plus new supercharger stations. But the Tencent deal should give Tesla a better understanding of the Chinese market, which should help future growth.
Investors clearly liked the move, at least initially: Tesla stock jumped 2.7% the day the Tencent deal was announced. At $305 as of this writing, TSLA is now up 43% year-to-date, and a whopping 60% since the beginning of December. That kind of run from a company with a $48 billion market cap tends to bring naysayers out of the woodworks.
Sure enough, Bob Lutz, a former Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) executive, said, “Raising capital is not going to help, because fundamentally the business equation on electric cars is wrong. They cost more to build than what the public is willing to pay. That’s the bottom line.”
Sour grapes? Perhaps. It’s no secret that traditional automakers — and their executives — resent Tesla Motors’ business model. And Ford, one of Lutz’s former companies, just got passed by TSLA as the second-largest American automaker by market cap, and GM is within spitting distance.
But Lutz does have a point: Tesla isn’t making money, and hasn’t for most of its relatively brief history. That hasn’t stopped TSLA stock from rising nearly 810% in the last five years, just like a lack of profits didn’t much hurt Amazon.com, Inc. (NASDAQ:AMZN) stock in its nascent stages.
Tencent Deal Keeps Tesla Stock Fresh
And yes, Tesla is still very much a young buck, especially as a public company, having debuted on the Nasdaq in June 2010. It’s still working out some kinks, particularly overseas. But its potential in places like China and India, each of which have four times as many drivers as America, is immense.
After a much better year in China, the Tencent deal should help improve its expanding Chinese footprint. And if nothing else, it looks good to investors when one of the richest companies in the world wants to be in business with you.
Tesla Motors may not be rich itself — yet — but TSLA stock is still fresh and hip in the eyes of most investors, something companies like Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) would kill to get back right about now. Things like the Tencent deal and Model 3 release should keep Tesla stock feeling fresh for quite some time.
I say buy now while it’s still ripe.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
