Snap's shares fell 16 percent to $12.67, well below their $17 initial public offering price in March, as investors fretted about Snap's slowing user growth in the latest quarter and viewed Tencent's move as an investment rather than the precursor to a merger.
"(Tencent) buys all sorts of minority investments, and I don't think we can extrapolate that this means they intend to take over the company," said Wedbush Securities analyst Michael Pachter.
Snap said it had only received the details of the stake from Tencent this month. Tencent's 145.8 million class A common shares of Snap, worth about $1.7 billion at Wednesday's price, give the Chinese company no voting rights.
Tencent president Martin Lau told Snap his firm is "excited" to deepen its relationship with the firm, Snap said in a regulatory filing. A Snap spokesman declined to comment further.
The Chinese tech company, which owns mobile chat service WeChat, has bought stakes in several companies over the past few years, including electric car maker Tesla Inc
Investments in the United States by Chinese tech heavyweights have become common, and the two countries unveiled $9 billion in new deals on the arrival of U.S. President Donald Trump in Beijing on Wednesday.
Apart from Tencent, Alibaba Group Holding Ltd
Snap's ownership structure, which reserves 95 percent of voting rights for its co-founders, made it likely Tencent was just accumulating a financial stake, analysts said.
While the stake could lead to a business partnership with Tencent and help Snap expand its reach into China, Morningstar analyst Ali Mogharabi said Snap's problems remained, chiefly slowing user growth and competition from Facebook Inc's
Snap co-founder and Chief Executive Evan Spiegel, who has in the past referred to Tencent as a role model, said on Tuesday that he was looking to redesign Snapchat to reach a broader audience.
Snap's daily active users (DAU) stood at 178 million in the third quarter, below expectations of 181.8 million, according to research firm FactSet.
The company has disappointed investors each quarter since it floated on the New York Stock Exchange in March. Snap has fallen by more than a half since its high of $29.44 on March 3, a day after it went public.
Unlike many US stock market-listed corporations, Snap is not obligated to disclose changes in Tencent's ownership of Snap's class A stock.
© Thomson Reuters 2017