Morgan Stanley Downgrades Tesla as AI Growth Expectations Rise

Morgan Stanley has downgraded Tesla (NASDAQ: TSLA) to Equal Weight from Overweight, saying the stock is now trading near fair value as expectations for its AI and robotics businesses surge. The investment bank set a new price target of $425, signaling about 6.5% downside from current levels. Despite the downgrade, analysts emphasized that Tesla remains a dominant force in electric vehicles, renewable energy, autonomous driving, and real-world AI.

Andrew Percoco, now Morgan Stanley’s lead Tesla analyst replacing Adam Jonas, noted that while Tesla is positioned to lead in autonomous mobility, network services, and humanoid robotics, many of these catalysts already appear priced into the stock. The firm revised its valuation model across autos, robotaxi, network services, and the Optimus humanoid program—assigning $60 per share in value to Optimus alone, supported by global humanoid market projections.

However, Morgan Stanley cut its auto business valuation to $55 per share after lowering long-term delivery forecasts through 2040. The analysts expect 1.6 million vehicle deliveries in 2026, reflecting slower global EV adoption and heightened competitive pressures, although Tesla is still projected to expand its U.S. market share.

The report highlights Tesla’s Full Self-Driving (FSD) technology as “the crown jewel” of its auto segment, projecting stronger recurring software revenue through higher long-term FSD adoption rates and increased average revenue per user. This segment now accounts for $145 per share of Morgan Stanley’s valuation. The bank also raised its near-term robotaxi assumptions but cautioned that regulatory and scaling challenges persist.

While robotics represents one of Tesla’s biggest long-term opportunities, Morgan Stanley applies a 50% probability discount to its humanoid valuation due to execution uncertainties. The firm underscores Tesla’s wide potential outcomes, pointing to 89% upside in its bull case and 70% downside in its bear case, setting the stage for a potentially volatile year ahead for TSLA investors.