Morgan Stanley has made a notable adjustment to its rating for Tesla (TSLA), downgrading the electric vehicle manufacturer’s stock to equal weight, which is equivalent to a hold. Despite this downgrade, the bank increased its price target for Tesla from $410 to $425. This seemingly positive move is misleading, as it suggests a 3.32% downside from the stock’s recent close of approximately $439.60. This mixed signal raises questions about the underlying valuation and market dynamics affecting Tesla.
At the heart of Morgan Stanley’s analysis is the valuation of Tesla’s stock. Analysts argue that the company’s shares are priced for perfection, reflecting lofty expectations for its future growth driven by artificial intelligence and humanoid robots. Yet, the core automotive business is facing challenges, including declining demand and the expiration of key tax credits, all within a cooling electric vehicle market. This divergence between an optimistic narrative and troubling fundamentals is a critical aspect of Morgan Stanley’s recent assessment.
Mixed Messages from Morgan Stanley
The latest call from Morgan Stanley represents a significant shift in its outlook on Tesla. Analyst Andrew Percoco and his team issued their first downgrade since June 2023, despite the upward revision of the price target. Percoco’s note emphasizes that the current stock price reflects the anticipated advancements in robotics and AI, which Tesla CEO Elon Musk has heavily promoted.
The challenge, according to Percoco, is that Tesla’s valuation stands at approximately 276 times forward non-GAAP earnings, positioning it among the most highly valued companies in the S&P 500. This figure is strikingly 1,500% above the sector median of 17 times, as highlighted by Seeking Alpha. Additionally, Percoco predicts a 12% decline in North American electric vehicle sales next year, putting further pressure on the company’s growth outlook.
It is noteworthy that Percoco takes over coverage from veteran analyst Adam Jonas, who has been a prominent voice on Tesla for years. Percoco is recognized for his expertise, holding a 5-star rating on TipRanks with an average return of 67% per rating. The consensus among Wall Street analysts currently places Tesla’s average price target at $393.29, indicating an 11% downside from the current trading levels.
Broader Trends in the Electric Vehicle Market
The adjustment in Tesla’s price target is part of a larger reevaluation of the electric vehicle sector. Morgan Stanley’s strategy suggests a shift away from pure-play EV manufacturers in favor of established automakers that are better positioned for a market characterized by reduced incentives and slower growth.
This broader assessment includes significant changes for other electric vehicle manufacturers. Rivian has been downgraded from equal weight to underweight, with a price target reduced to $12, largely due to challenges posed by what has been termed an “EV winter.” The removal of the $7,500 federal tax credit has intensified pressure on Rivian. Additionally, the company is facing substantial cash burn associated with its upcoming R2 model launch, which could lead to billions in expected losses.
Lucid Motors has faced even harsher treatment, downgraded to sell/underweight with its target slashed from $30 to $10, as concerns grow about profitability in the luxury EV segment. In contrast, General Motors received an upgrade to buy, with its price target raised to $90, highlighting the belief that traditional automakers with robust internal combustion engine and hybrid portfolios may benefit as policymakers reconsider EV incentives.
The electric vehicle market, which had enjoyed rapid growth over the past decade, is now showing signs of strain. According to Cox Automotive, U.S. EV sales reached a record 438,000 units in the third quarter of 2025, marking an increase of nearly 30% year over year. This surge was largely driven by consumers rushing to take advantage of the now-expired tax credits, which provided a significant incentive to purchase electric vehicles.
Looking ahead, Morgan Stanley forecasts an impending “EV winter,” projecting a 20% decline in U.S. EV volumes in 2026. Current data supports this outlook, with November U.S. auto sales down 8% and the market share of battery electric vehicles (BEVs) dipping to 5.3%. A recent survey by EY also revealed a shift in consumer interest, with enthusiasm for combustion engines rising significantly while interest in electric and hybrid vehicles has waned due to policy uncertainties.
The year 2025 has been particularly tumultuous for Tesla, with stark contrasts between stock performance and operational realities. In the first half of the year, Tesla struggled with declining deliveries and unstable pricing, while the latter half saw a rebound as investors began to embrace the AI and Robotaxi narratives.
In summary, Morgan Stanley’s recent adjustments regarding Tesla and the broader electric vehicle market reflect a complex interplay of valuation, market sentiment, and emerging trends, positioning Tesla at a crucial juncture in its trajectory.
