Morgan Stanley's Downgrade of Tesla: Is the EV Giant Still a Buy?

The recent downgrade of Tesla (TSLA) by Morgan Stanley from "Overweight" to "Equal-weight" has sparked intense debate among investors. While the firm raised its price target to $425 from $410, the move signals a more cautious outlook for the electric vehicle (EV) leader. At the heart of this decision lies a critical tension: Tesla's soaring valuation, driven by speculative bets on artificial intelligence (AI) and robotics, versus the reality of a slowing EV market and regulatory headwinds. For long-term investors, the question remains: Is Tesla still a compelling buy, or has the stock become a victim of its own hype?

Valuation Realism: The AI Premium vs. Compressed Margins

, a multiple typically reserved for high-margin software companies according to analysis. Yet, the firm's core automotive business-accounting for 72% of total revenue-has seen margins compress to 16%, aligning with legacy automakers like Ford. This disconnect between valuation and fundamentals has drawn scrutiny. Morgan Stanley's Andrew Percoco argues that Tesla's non-auto segments, including Full Self Driving (FSD) and robotaxi, are now "fairly priced or overvalued," as investor optimism has inflated expectations.

The challenge for Tesla lies in justifying this premium. according to projections, such projections hinge on regulatory approvals and scalable deployment. For now, these initiatives remain aspirational. As one analyst notes, "Unless Tesla's AI bets deliver tangible revenue streams soon, the current valuation may struggle to hold" according to analysis.

EV Market Saturation: A Cautious Outlook

The EV market, once a growth engine for Tesla, is showing signs of saturation. , according to analysis. Chinese competitors like BYD are eroding Tesla's market share, particularly in Europe according to market reports. Morgan Stanley has slashed its sales forecasts, and an 18.5% reduction through 2040.

This slowdown is not unique to Tesla. Global EV adoption is decelerating as initial demand wanes and supply outpaces growth. However, Tesla's reliance on rapid volume expansion makes it particularly vulnerable. "The EV race is no longer about first-mover advantage but execution in a crowded field," observes a report by Bloomberg.

AI and Robotics: Hype or Hope?

Tesla's pivot to AI and robotics offers a potential lifeline. The robotaxi initiative, for instance, is positioned as a transformative play, according to projections. Yet, regulatory hurdles loom large. The camera-only FSD system faces scrutiny for safety concerns, and adverse weather conditions have exposed scaling challenges according to industry analysis.

Moreover, the energy division-Tesla's most consistent growth area-remains a wildcard. Revenue from Megapacks and grid solutions surged 44% in Q3 2025 according to financial reports, driven by demand for AI data center infrastructure. While this segment provides stability, it is unlikely to offset automotive headwinds alone.

Is Tesla Still a Buy?

The answer depends on an investor's risk tolerance and time horizon. Morgan Stanley's downgrade underscores near-term risks: valuation overreach, EV market saturation, and regulatory uncertainty. However, the firm also acknowledges Tesla's "attractive " for those who believe in its long-term vision according to financial analysis.

For conservative investors, , offering limited margin of safety. Aggressive investors, however, may see value in Tesla's AI and energy bets, provided they can weather short-term volatility. The key will be monitoring progress on FSD deployment and robotaxi trials-tangible milestones that could validate or undermine the stock's premium.

Conclusion

Tesla stands at a crossroads. Its valuation reflects a future where AI and robotics dominate earnings, but the present reality is one of compressed margins and slowing EV sales. Morgan Stanley's downgrade serves as a reality check, urging investors to separate hype from substance. While the stock is not a slam-dunk buy, it remains a high-conviction opportunity for those who believe in Tesla's ability to reinvent itself beyond the automotive sector.