Morgan Stanley downgrades Tesla: what was the reason?

Elon Musk aims to transform Tesla Inc. into a robotics and artificial intelligence company, but the electric vehicle manufacturer’s stock price already reflects these business areas and is at a “full valuation,” according to Morgan Stanley, which downgraded the company to an equivalent of “hold” for the first time since June 2023, UNN reports.

DetailsTesla shares are trading at a price approximately 210 times their projected earnings for the next 12 months, making it the second most expensive company in the S&P 500 index, trailing only Warner Brothers Discovery Inc. at 220 times and significantly ahead of Palantir Technologies Inc., which ranks third with a multiple of 186.

“While it is well understood that Tesla is more than just an automaker, we expect a volatile trading environment” next year, analyst Andrew Percoco wrote in his Sunday note to clients, his first as the new head of Tesla coverage. “We see potential for valuation compression, while the catalysts for its non-automotive businesses are clearly priced in at current levels.”

Percoco’s new price target for the stock of $425 implies a 6.6% downside from Friday’s close. He will replace long-time Morgan Stanley Tesla analyst Adam Jonas, who, according to Bloomberg, had given Percoco’s stock an “overweight” rating since September 2023. Percoco’s current rating is equivalent to an overweight rating. The average price target is $388, and the company now has 28 “buy” ratings, 19 “hold” ratings, and 16 “sell” ratings.

On Monday, the stock fell 3% to $441.

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Percoco wrote that the company is positioning itself as a leader in humanoid robots and values its Optimus initiative at $60 per share. However, he expects North American EV sales volume to decline by 12% next year amid an industry-wide downturn.

Tesla shares have largely recovered from profit declines this year as CEO Musk emphasized AI projects such as self-driving cars and humanoid robots. However, the year has been volatile for the company’s stock: it has risen by approximately 10% this year after gains of 63% in 2024 and 102% in 2023. The S&P 500 index has risen by more than 16% this year.

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