Tesla's swelling inventory suggests Musk will keep cutting prices

In the two weeks since Tesla alarmed investors by revealing how much of a toll discounts were taking on its profit margins, Elon Musk has bumped prices back up across the lineup.

But the April 20 increases on the Model S and X and this week's tiny markups on the Model 3 and Y probably aren't all-clear signals indicating Tesla's pricing will stabilize for long. The dynamics that led the company to slash the costs of its vehicles the last few months — more supply than demand — appear to have stubbornly stuck around.

Blogs that aggregate vehicle listings on Tesla's website are finding that inventory has kept building — in the US, Europe and globally. @TroyTeslike, a Twitter user who counts many analysts and investors among his almost 110,000 followers, posted this week that Tesla has a backlog of around 72,000 orders, a fraction of the 476,000 he calculated as of late July last year.

"Tesla is clearly transitioning from being supply constrained (where delivery volumes grow in line with production capacity and prices increase) to being demand constrained (where prices fall to stimulate demand and production outpaces delivery)," Toni Sacconaghi, a Bernstein analyst with a sell rating on the stock, wrote in a May 1 report. One of Tesla's more bullish analysts has arrived at a similar conclusion. Alexander Potter of Piper Sandler just cut his price target to $280 — still the fourth-highest among analysts tracked by Bloomberg — to reflect his concern that the carmaker's valuation might languish for a few months because of falling prices and margins.

"Wait times haven't spiked meaningfully, so Tesla may cut prices further," Potter wrote this week, still maintaining his buy recommendation.

Tesla has pulled some relatively inexpensive levers to try to perk up demand. Its order pages recently added a button promoting demo drives, and the company is now offering Model S and X buyers three years of free supercharging. Sacconaghi has speculated Tesla may start spending on advertising, or offer free trials of the features it calls Full Self-Driving to stoke adoption of the $15,000 driver-assistance system.

The 15 days supply of vehicles in inventory that Tesla reported for the first quarter is relatively healthy by industry standards. But the way this figure has trended — it's at the highest since the start of the pandemic, even after all the recent price cuts — isn't encouraging. The closer the company gets to what's considered the norm in the auto sector, the more its over $500 billion market capitalization is at risk of shrinking.

Phillippe Houchois, an analyst at Jefferies who downgraded Tesla to a hold a week ago, warned it might end up looking more like the companies Musk has sought to disrupt than previously thought.

"Autos' structurally low returns may prevail over Tesla in the end," Houchois wrote on April 26, cutting his price target by 20 percent to $185 and questioning how similar the company's moves are to what Ford did with the Model T, or what Apple did with the iPhone.

"It is harder to challenge a large established industry," he wrote, "than create a new one."