Morgan Stanley’s aggressive optimism, particularly in the very bullish views of chief analyst Adam Jonas, was a source of comfort for Tesla’s diehard supporters for a long time. The same analyst who previously hailed the “$500 Bull Case“, which was driven by the company’s anticipated trajectory towards AI supremacy, has finally made a bold retreat.
As the company decreased Tesla’s rating to “Equal-Weight,” a psychological jolt that seems larger than the 3.4% fall, which the stock suffered right after the announcement, has been delivered to Wall Street.
When the firm that practically created Tesla’s high valuation, signals that the price is now “fully priced in,” it changes the perception of the market. This change compels the investors to do the conflicting calculations which they have been ignoring conveniently while surfing the AI wave.
The downgrading of the stock is not merely a change in rating, but is rather a readjustment of the expectations. Tesla’s bright future is promising, but its present price is being artificially raised to depend on the hedge that no longer has institutional support. This is where sentiment meets valuation, and the market is left to decide which side it trusts more.
An Impactful Reality
Narrative conflict is to be considered the biggest barrier faced by Tesla today. It is an automaker on one hand that has to deal with very tough competition in China, the decreasing EV incentives in the U.S, and the declining hardware margins. On the other hand, it is presenting itself as a leader in “Embodied AI”, the place where autonomy, robotics, and full self-driving technology of the future reside.
Over the years, investors have continuously chosen to price the stock based on its latter identity, and tether its valuation to technology perfection rather than automotive performance.
Morgan Stanley’s downgrade gets rid of this assumption. Through changing over to a neutral position, they are in fact saying that the future AI-driven vision is possible, but is not guaranteed at a price of $440 per share. This is a makeover from “Growth at any price” to “Show me the revenue.”
The market is now waking up to the fact that one cannot give valuations based on 2030 robotaxi fantasies while 2025 manufacturing margins are already showing signs of strain. Tesla’s grand narrative remains integral, but the hope of perfect execution is broken officially.
The Valuation Test
Tesla’s valuation premium has always been very strange, where investors accounted for it by the promise of high software margins that would in fact make the hardware business a secondary one. But valuation is ultimately a negotiation, and Tesla has now to renegotiate.
With the stock valued over 190x Forward Earnings, the dissimilarity is strong. Toyota and GM are held between 7x and 11x comfortably, while a tech giant like Google is at around 28x. Tesla’s multiple is not just high, it is out of this planet.
Morgan Stanley’s $425 price target implies no upside from now, which basically means the institution has decided that the “Sanity Test” has failed for now. In case the Robotaxi rollout is facing delays by regulations, technological challenges or slower than expected deployment, then a 190x multiple would not be supported by any mathematical argument.
If the hyper-growth AI story goes down even a bit, Tesla will be compressing towards a traditional high-growth tech valuation, which will be 30x instead of 190x. Just that shift would create huge selling pressure on the present stock price.
The Missing Cybercab
Currently, it’s the future potential rather than the current product that is being paid for by investors. The Cybercab is the main character of the AI tale, but it still lacks a lot of things. There is hardly any regulatory clarity, timelines are vague, and the engineering design remains mostly hidden behind corporate hope. In China, BYD and Xiaomi are provoking severe price wars that not only affect but also cut into Tesla’s profits.
In the U.S, the abolition of the EV tax credits has caused a decline in demand in a market that was already experiencing a slowdown. Thus, there is an awkward disparity between the promises made by Tesla and the actual performance reflected in their financial statements today.
Good Enough Competition
The data from Tesla’s fleet was always the most important part, it was a great advantage. Processing billions of miles of real-world driving data was the basis for its Full Self-Driving (FSD) promises. But competitive moats are only as strong as the alternatives that appear. The threat now consists of the competition that achieves “good enough” performance, which is faster than expected.
Waymo has already been scaling its totally driverless robotaxi operations and is going to more cities as the authorities give their approval. In China, companies related to Huawei and EV manufacturers such as XPeng are making their driving automation technologies very quickly. If competitors introduce the scalable Level-4 autonomy in some cities before Tesla gets to the true Level-5, then Tesla’s fleet data ceases to be a monopoly, instead it becomes just one of the many approaches.
Bottom Line
Tesla has reached a point where the confidence in its AI future is clashing with the reality of its current situation. The stock at $439 is not just supported by hype anymore. The change of Morgan Stanley’s view is significant because it came from the most devoted supporter of Tesla, which indicates that even the most loyal bulls now require proof rather than promises.
The demand for EVs might continue to go down the road, and Tesla might be classified as a struggling automaker rather than an AI leader, which could easily bring the stock down. The story of easy gains from AI is over and now the company needs execution, real results, real timelines, and real margins to climb up the ladder. The vision is still alive but from now on, the company is going to have to fight to prove that it is worth the premium that investors have been willing to pay for years.
