Morgan Stanley Just Broke Up with Tesla: Should You Buy or Sell TSLA Stock Here?

Morgan Stanley, which has been a permabull on Tesla (TSLA), has downgraded the stock from an “Overweight” to “Equal-Weight” while raising its target price to $425 from $410. The news came as a shock to me, as Morgan Stanley analyst Adam Jonas had been among the biggest Tesla stock bulls in the sell-side community.

However, the downgrade hasn’t come from Jonas, who has shifted to a new internal role focused on artificial intelligence (AI) companies, but from Andrew Percoco, who has assumed the coverage. Still, it is the first Tesla downgrade from Morgan Stanley in two years, so it would be prudent to explore the context. Let's examine why Morgan Stanley downgraded TSLA shares and whether it's time to give up on the Elon Musk-run company.

Why Did Morgan Stanley Downgrade Tesla?

Morgan Stanley is circumspect on Tesla’s automotive business and expects cumulative volume growth to be 18.5% lower through 2040 due to slower adoption in the U.S. and rising competition in global markets. I would fully share the sentiments, and as noted in a previous article, the U.S. EV industry slump would be a bit more elongated than the “few rough quarters” that Musk predicted during the Q2 2025 earnings call. The competition from Chinese competitors is for real, and they are expanding in China and Europe to Tesla’s detriment. To borrow a previous phrase from Musk, Chinese companies might come close to “demolishing” Tesla’s U.S. volumes if not for the 100% tariff that practically closes the U.S. market for EV imports from China.

As for the non-automotive business, which admittedly drives the bulk of Tesla’s valuation, Percoco believes that initiatives like autonomous driving and Optimus humanoid are priced into the stock. The Morgan Stanley analysts also flagged execution risk, which is for real, as Tesla hasn’t had any unqualified success story since the Model Y, and the once-hyped Cybertruck failed to gain traction.

While he admits that Tesla’s camera-only approach to self-driving has cost advantages over competitors like Waymo, which also use sensors, he warned that the company would “need to prove a very high level of safety in order to gain the trust of regulators, particularly in areas of the US with greater risk of inclement weather.” Notably, Tesla’s full self-driving (FSD) software has been found wanting in extreme weather conditions like heavy rain and snow.

Percoco also cited competition from Chinese companies in the humanoid robot space, something I have long been warning about. China is supporting domestic tech companies amid the apparent AI war, and Chinese companies are coming up with everything from AI chips to humanoids. For instance, XPeng Motors (XPEV), which I believe has earned the position as the “Tesla of China,” unveiled its “most human-like” IRON humanoid at the AI Day last month, whose mass production is expected to commence by the end of 2026.

Should You Buy or Sell TSLA Stock?

Percoco warned that Tesla would be volatile over the coming year. I would add that volatility is something that investors sign up for when they buy TSLA, as, apart from fundamental factors, a mere social media post from the mercurial Musk can trigger wild price swings in TSLA stock.

All said, the next couple of years are quite crucial for Tesla. The first key test for the company would be removing the safety drivers from the robotaxis, as by Musk’s own assertion, autonomy holds the key to Tesla’s current valuation. The company has been kicking the can down on full autonomy for years now but would need to deliver on that milestone soon, as beyond a point, there won't be many buyers of the “end of the year” promise. On a similar note, robotaxi expansion, both in the U.S. and internationally, would be a key driver for Tesla shares over the next year.

Optimus production is also expected to begin by the end of next year, and news flow around the humanoid, which Musk believes “has the potential to be the biggest product of all time,” could lead to volatility.

I expect Tesla’s deliveries to be tepid in 2026, and while markets would be willing to look the other way if the company delivers on AI products like full autonomy and humanoids, things would start getting ugly if it falters on that front. Overall, I remain on the sidelines on TSLA shares and will wait for a better entry point before adding more.