What will Tencent get out of its 12% stake in Snap Inc.?
At a moment when skepticism abounds about Snap Inc.’s future, one of the world’s biggest internet companies was revealed to be banking on the company’s success.
Tencent, the Chinese company behind the wildly popular social media app WeChat and a global player in mobile gaming, has bought an approximately 12% stake in Snap, the parent company behind the video messaging app Snapchat, financial filings showed Wednesday.
For the record:
8:05 a.m. Nov. 8, 2017An earlier version of this article stated that Tencent bought a 10% stake in Snap. The stake is about 12%.
News of the $2-billion investment arrives at a troubling time for Snap. The Venice company released its third-consecutive quarter of lackluster financial results Tuesday and its shares have continued to slide further away from their $17 stock market debut in March.
But Tencent, one of China’s three leading internet companies along with search engine Baidu and e-commerce giant Alibaba, sees something in the struggling company that could help reverse Wall Street’s souring view.
“Any time a given investor — whether a company or random billionaire — makes a big investment it can help to convey that at least someone out there believes in the long-term potential for the company,” said Brian Wieser, an analyst for Pivotal Research Group.
Snap shares dove nearly 20% Tuesday in after-hours trading after the company reported lower-than-expected revenue and user growth. They fell $2.21, or 14.6%, to $12.91 on Wednesday in the company’s highest-volume day of trading since its initial public offering.
Tencent has been leading a wave of foreign investment by China’s tech giants in recent years. The Shenzhen company bought a 5% stake in Tesla Inc. earlier this year and paid $8.6 billion last year to purchase Supercell, the Finnish developer behind the hit mobile game “Clash of Clans.”
Alibaba, meanwhile, has already invested $200 million in Snap and poured millions more into ride-hailing app Lyft, virtual reality start-up Magic Leap and app search engine Quixey.
Baidu, which invested in Uber’s now shuttered Chinese operations in 2014, has focused on opening research and development facilities in Silicon Valley and Seattle.
Tencent’s $2-billion investment in Snap represents the fifth largest involving a Chinese firm acquiring or taking a stake in a U.S. tech firm, according to S&P Global.
Despite their U.S. investments, Chinese technology companies have shown little interest in attempting to win over the American market with their products. Doing so would be exceedingly hard given America’s already mature software market and the lack of name recognition the Chinese firms command.
Instead, the companies’ foreign investment is driven by a desire to diversify their holdings beyond their Chinese products, analysts say.
It also gives the firms technological know-how to bring back to a thriving Chinese market with more than 730 million internet users and protectionist policies that keep most foreign competition out. Snapchat, like Twitter, Facebook and YouTube, is banned in China.
An all-out acquisition of Snap by Tencent also remains unlikely. Beijing has been cracking down on the biggest outbound investments over concerns about capital flight. And Washington has grown increasingly wary of Chinese tech acquisitions on national security grounds.
“It seems highly unlikely that Tencent would ever be in a position to buy the whole company,” Wieser said.
Sam Kemp, senior research analyst at Piper Jaffray, said in a note to investors Wednesday morning that he did not see Tencent’s investment as a “material thesis changer” for Snap.
Snap’s co-founders hold almost all voting rights, so Tencent can’t acquire the company if the co-founders don’t want it to, he said in the note. And the Chinese firm previously invested in Snap, so increased investments “should not be understood to be new interest in the company.”
“Tencent being an owner of nonvoting shares will not change the narrative around Snap three months from now,” Kemp said in the note.
Tencent’s stake in Snap amounts to 145.8 million shares of Class A, nonvoting stock.
Although the stake could increase Snap’s credibility among other investors, analysts said the benefits are more likely on Tencent’s end.
The tech company has captured a massive user base and is a behemoth in China. WeChat, which features video messaging, boasts 963 million monthly active users — a community that includes the vast Chinese diaspora.
“They want to become a global player,” Willy Shih, professor of management practice at Harvard Business School, said of Tencent.
A stake in Snap could help Tencent better understand the app’s technology, and — more important — it fits into the company’s history of interest in U.S. internet-related companies. Tencent already owns Los Angeles game developer Riot Games, which makes the popular “League of Legends” game, and has invested in anonymous social media app Whisper.
Investment in U.S. tech companies could help Tencent gain access to executives and get a stronger foothold in the tech scene.
“First and foremost, Tencent is trying to learn more about the U.S. internet market and be in a position to strategically grow in the U.S. when and if they want to,” said Michael Graham, managing director and senior internet analyst at Canaccord Genuity.
At other firms, a stake of this size would typically lead to a board seat, said Youssef Squali, internet analyst at SunTrust Robinson Humphrey.
In this case, he said, “maybe you don’t get a board seat, but maybe you get the ear of Evan” Spiegel, Snap’s chief executive.
Snap disclosed the Tencent stake in its third-quarter earnings report filed Wednesday morning with the Securities and Exchange Commission, but it was not clear when exactly Tencent purchased those shares on the open market. In the filing, Snap only said Tencent “recently” notified it of the purchase.
Snap said in its filing that it was not obligated to report the new stake because Tencent bought nonvoting shares. Squali said Snap may have chosen to disclose the news because it’s “a very nice headline to have, particularly on the back of the numbers last night.”
Snap revealed Tuesday that its loss tripled to $443.2 million during the third quarter on weak user growth and revenue. The app is getting a redesign to make it easier to use.
Snap faces intense competition from Apple, Facebook’s Instagram and WhatsApp, and Google’s YouTube.
The Associated Press contributed to this report.
3:40 p.m.: This article was updated to include more context about Tencent.
9:45 a.m.: This article was updated with comments from additional analysts.
7:05 a.m.: This article was updated with comments from an analyst’s note and more detail on Snap’s earnings.
This article was originally published at 4:20 a.m.