Electric vehicle (EV) giant Tesla (TSLA) continues to struggle this year as demand weakens in major markets like Europe and China, where competition is increasingly tough and the core EV business simply isn’t generating the same enthusiasm as before. In fact, much of the market buzz around Tesla today has shifted toward artificial intelligence (AI), autonomous vehicles, and robotics—exactly the way CEO Elon Musk wants the story told. Still, the performance of the core EV business is important, and that’s where the latest caveat comes into play.
Morgan Stanley just downgraded Tesla, taking a more cautious stance on the broader U.S. auto sector heading into 2026. The bank warned of a potential “electric vehicle winter” that could impact demand and profitability across the industry. The top investment bank now expects U.S. light vehicle sales to decline to 15.9 million units next year, with EV volumes falling around 20% and battery electric vehicle penetration falling to 6.5%.
Morgan Stanley believes hybrid and internal combustion models could see a modest increase, but notes that affordability challenges, tight credit and tariff-related pricing pressures could still dampen consumer demand. Additionally, analyst Andrew Percoco downgraded Tesla to “Equal Weight” from “Overweight,” arguing that while Tesla remains a leader in electric vehicles, manufacturing and artificial intelligence, its valuation already values much of the enthusiasm around robotaxis and humanoid robotics.
He sees a “challenging catalyst path” over the next 12 months as the electric vehicle business faces weaker margins and slower deliveries, while the potential for improved autonomy appears largely discounted at current levels. So now that Morgan Stanley is becoming more cautious about Tesla, is it time to rethink its position?
Few companies push the boundaries like Tesla. Tesla, once known simply for electric cars, has quickly transformed into a technology company pursuing advances in artificial intelligence, autonomous driving, robotics and clean energy. Whether autonomous robotaxis or factory-ready humanoid robots, Tesla’s ambitions go far beyond the road. Yet for all the futuristic promise, the company’s core electric vehicle business continues to play a crucial role in shaping its path forward.
With a market capitalization of around $1.48 trillion, Tesla occupies a coveted spot within the “Magnificent Seven” group. In any case, 2025 has not been entirely smooth. Political controversies surrounding Elon Musk earlier this year, growing competition from electric vehicles and slowing demand in key markets have weighed on sentiment. Still, Tesla stock has held up remarkably well, and the reason goes far beyond cars.
Investors are increasingly betting on artificial intelligence, autonomy and robotics, treating them as potential megaproducts that could one day eclipse Tesla’s entire automotive business. Despite headwinds earlier this year, TSLA stock is up 12.85% in 2025 and recent momentum has been even stronger.
The stock has risen an impressive 31.04% in the past three months alone, far outpacing the broader S&P 500 Index ($SPX)’s 5.5% gain over the same period. In fact, TSLA stock is down just 7.52% from its 52-week high of $488.54, reached in December 2024.
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When looking at Tesla through traditional valuation lenses, the numbers are instantly apparent. The stock trades at an astonishing P/E ratio of 303.16 times and 14.99 times the sales price, compared to industry norms of just 19.7x and 0.95x, respectively.
Typically, investors only pay those kinds of premium prices for companies that are growing like crazy and generating big profits. And at least for now, Tesla’s electric vehicle business doesn’t show it. So it’s no surprise that Morgan Stanley thinks much of the excitement, especially around artificial intelligence and robotics, is already built into the share price.
Tesla’s fiscal 2025 third-quarter report, released in late October, presented a mixed, but undeniably intriguing update for investors. Revenue was the standout headline, rising 12% year over year (year-over-year) to $28.1 billion, handily beating Wall Street expectations of $26.6 billion. Importantly, this marked Tesla’s first quarter of the year showing growth compared to 2024. A late-quarter rush of U.S. buyers trying to secure the now-expired $7,500 EV tax credit helped fuel a significant increase in demand.
That last-minute boost helped Tesla’s core automotive business turn around, with segment revenue rising 6% year over year to $21.2 billion. However, the real star of the quarter was once again Tesla’s energy arm. The company’s energy storage division posted a massive 44% revenue increase to $3.4 billion, driven by accelerated adoption of its advanced battery solutions.
This segment has now generated repeat double-digit growth, cementing its position as one of Tesla’s most resilient and rapidly expanding businesses. Still, behind those optimistic revenue numbers, the margins told a much more cautious story. Continued price cuts aimed at keeping pace with intense global competition for electric vehicles continued to erode profitability. Gross margin fell to 18%, down from 19.8% a year ago, while operating margin fell 501 basis points to 5.8%.
Adjusted EPS fell 31% year over year to $0.50, falling roughly 10.5% below analyst forecasts and highlighting the cost of protecting market share. Looking ahead, Tesla seems focused on executing its most ambitious ideas. The company is looking to 2026 for “volume production” of some of its biggest upcoming launches, including the long-awaited Cybercab robotaxi, its Semi heavy-duty truck, and the next-generation Megapack 3 energy storage platform.
Meanwhile, Tesla is also moving forward with one of its most futuristic bets: the humanoid robot Optimus. The company has begun ramping up its first manufacturing lines, indicating that Tesla’s much-discussed shift from electric vehicle maker to robotics and artificial intelligence powerhouse may finally be moving from concept to commercial reality.
Right now, Wall Street isn’t exactly aligned with Tesla’s next chapter. The stock has a consensus rating of “Hold,” underscoring how divided analysts are. Among the 41 analysts covering TSLA, 14 rate it a “Strong Buy,” one calls it a “Moderate Buy,” 17 are staying on the sidelines with a “Hold,” and nine have gone all the way to a “Strong Sell.”
Tesla is already trading above its average price target of $385.15, but that doesn’t mean the bull story is over. The most bullish voices on the street still think the stock could reach $600, implying an upside of around 33.2% if the company can execute on its ambitious vision.
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While Morgan Stanley might be cautious, its recent downgrade doesn’t rule out Tesla’s long-term view. It simply underscores the increasingly challenging landscape the company must navigate to get there. Slowing demand for electric vehicles, tighter margins and growing competition are creating real pressure today, while much of tomorrow’s promise in artificial intelligence and robotics is already priced into stocks. Tesla may still have the potential to reshape multiple industries, but investors now have to decide whether that future is compelling enough to justify the risks unfolding in the present.
On the date of publication, Anushka Mukherji had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
