Tesla stock drops as new Morgan Stanley analyst downgrades shares, citing valuation

Core Viewpoint - Morgan Stanley downgraded Tesla's stock rating from Overweight to Equal-weight while increasing the price target to $425 from $410, reflecting a cautious outlook on the company's auto business and a balanced view on its AI ambitions [1][2][3]. Group 1: Analyst Changes and Price Target - Andrew Percoco has taken over coverage of Tesla, downgrading the stock rating while raising the price target based on a sum-of-the-parts analysis [1][3]. - The increase in price target includes an additional $60 per share attributed to the humanoid robotics business, despite a moderated outlook on the auto and energy sectors [3]. Group 2: Market Expectations and Valuation - High expectations surrounding Tesla's AI initiatives have led to a premium valuation, which is now considered fairly priced [2]. - The analyst anticipates a choppy trading environment for Tesla shares over the next 12 months, with downside risks to estimates and current catalysts for non-auto businesses already priced in [2]. Group 3: Auto Business Outlook - The downgrade reflects a reduction in auto volume expectations, with a projected 10.5% decrease in 2026 volumes and an 18.5% reduction in cumulative deliveries through 2040 due to cautious views on EV adoption and increasing competition [4]. - Full Self Driving (FSD) remains a significant competitive advantage for Tesla, viewed as a game changer in the auto business [6]. Group 4: Robotaxi Developments - Percoco predicts approximately 33 new robotaxi service launches across the US in 2026, a significant increase from the 11 expected in 2025, with testing expected in Nevada and Arizona [7]. - Potential growth in robotaxi services may be tempered by regulatory hurdles and scaling challenges related to adverse weather conditions [8].