Last week, we got the news that a Chinese company by the name of Tencent Holdings had invested in ASX market darling Afterpay Ltd (ASX: APT), acquiring an approximate 5% foothold of the buy now, pay later pioneer.
Afterpay has been one of the most successful ASX shares to have held onto over the past few years – and also one of the most volatile.
Over the past 5 years, Afterpay shares have risen from around $3 each to over $41 at one point – making this stock well over a 'ten-bagger' over this period with a 1,266% return.
But it has sure been a bumpy ride. Over the past 3 months alone, Afterpay has gone from $41 a share down to $8 and then back to around $40. It's enough to give anyone whiplash.
But part of this recent volatility has been the presence of Tencent – a humongous tech giant. Since we found out about Tencent's interest in Afterpay, the share price has climbed 34% alone. So who is this company? And why are investors so excited about its interest in Afterpay?
Ten cents on Tencent
Tencent is one of the most valuable companies in China with a market cap of approximately US$510 billion. It's a conglomerate that was founded in 1998 and is dual-listed in both Hong Kong and in the United States. Its primary fields are the gaming industry and the social media scene.
In gaming, Tencent owns a 5% stake in French game maker Ubisoft and full ownership of Riot Games, which makes League of Legends. Tencent also has a 40% stake in Epic Games, the makers of the uber-popular Fortnite, and a 5% chunk of the American gaming giant Activision Blizzard, which makes the well-known Warcraft and Call of Duty series.
On the social media scene, Tencent owns both QQ and WeChat – 2 of the most popular apps in China. Since US companies like Facebook and Alphabet (Google) are banned in China, Tencent's apps function as Chinese alternatives, offering messaging services as well as digital payments.
What does Tencent's interest in Afterpay mean?
Well, most investors are voting that Tencent's involvement in Afterpay is good news for the company and I agree. Having the backing of a giant like Tencent means Afterpay will have access to virtually unlimited funding as well as leverage to tap into Asian markets in the future – perhaps even China.
Afterpay's founders said it best when they gave us this insight into Tencent's interest last week:
Tencent's investment provides us with the opportunity to learn from one of the world's most successful digital platform businesses. To be able to tap into Tencent's vast experience and network is valuable, as is the potential to collaborate in areas such as technology, geographic expansion and future payment options on the Afterpay platform.
Foolish takeaway
I think the fact that Tencent has acquired a stake in Afterpay is great news for the company's long-term future. In my view, Tencent wouldn't have made this move unless it saw massive future potential for Afterpay in Asia, which is very exciting for investors.
