Investors giving ‘cash incineration engine’ Tesla a lot of rope, but may soon lose patience

One hedge fund manager is noticing Tesla’s large investment spending and doubts it will bear fruit.

“There is no question that Tesla makes a good luxury car, there is some question about whether Tesla is a well run company, given the production delays and huge cash burn and there are serious questions about whether holders of the stock at these levels could ever make a positive return,” Morgan Creek Capital’s founder and chief investment officer Mark Yusko, whose firm manages $1.8 billion, wrote in an email. “Every month that passes without significant deliveries of the Model 3 will shine the lights on Tesla and force stockholders to check under the hood and they may be distressed to find a cash incineration engine.”

The company’s shares are outperforming the market this year, up more than 60 percent. Tesla’s long-term performance is even more impressive. The stock is up nearly 1,200 percent since the end of 2010 compared with the market’s roughly 100 percent return in the same time period.

After the stunning stock move, it is now valued at a much higher price-to-sales multiple than many of its automaker peers.

Morgan Creek’s fund manager thinks the expectations built in to Tesla’s high valuation will lead to disappointing future returns for the company’s shareholders.

“To own Tesla stock at these valuations, one must believe that a company that has never hit an earnings milestone in its history can suddenly solve their production problems, solve their technology scaling challenges, stem their massive cash burn rate and hope that no other luxury car maker ever offers a competing EV,” Yusko said. “We are fond of saying that Hope is not an investment strategy, it is a four letter word and it appears that time may be running out for the Teslarians.”

But one Wall Street analyst believes it is too early to give up on Elon Musk’s vision yet.

“I think that as long as fear is absent from the market, the market will mostly look the other way on [Q3 delivery] misses like this because there is a lot of faith that Tesla will be far bigger in time than it is today,” Morningstar’s auto analyst David Whiston wrote in an email.

“Whether the Model 3 line gets going full speed in 2017 or early 2018 doesn’t matter much in the long-run. A more serious issue would be a delay impacting large volume of Model 3 deliveries for several quarters, or even a year, but there’s no evidence to suggest that is a real risk right now.”

Tesla did not respond to a request for comment.

Disclosures: Yusko’s firm manages a fund of hedge funds and also does direct and private investments.

“We have an underlying manager in our main Fund who is long and we have a small synthetic [Tesla] short (using options) to offset,” he said.