Tesla Inc. (TSLA) shares took a hit Monday after Morgan Stanley threw some cold water on the stock's momentum, downgrading it from Overweight to Equal-Weight. The message? Tesla's impressive rally may have gotten a bit ahead of itself.

Analyst Andrew Percoco set a $425 price target and made it clear the downgrade isn't about questioning Tesla's technological edge. The company remains a clear leader in electric vehicles, manufacturing innovation, renewable energy, and real-world AI applications. It absolutely deserves a premium valuation compared to traditional automakers.

But here's the rub: high expectations around Tesla's AI ambitions have pushed the stock to levels where much of that potential already seems baked in. "Looking out over the next 12 months we see a challenging catalyst path, with downside to consensus estimates, while positive catalysts for its non-auto business appear priced at current levels," Percoco wrote.

The Auto Business Still Matters

Here's something investors sometimes forget when they get excited about robotaxis and humanoid robots: Tesla still needs its car business to fund all those moonshot projects. Percoco emphasized that while Tesla is legitimately more than just an automaker, sustaining meaningful upside will be tough without stabilization in the auto segment, which remains the primary cash generator for ambitious ventures like autonomous driving and the Optimus robot.

And that auto business faces headwinds. Morgan Stanley's downgrade comes alongside a broader industry forecast predicting what the firm calls an "EV Winter" lasting through 2026. The culprit? The expiration of the $7,500 federal EV tax credit, combined with ongoing affordability concerns, range anxiety, inadequate charging infrastructure, and worries about resale values.

Morgan Stanley expects U.S. EV volumes to plunge approximately 20% year-over-year in 2026. "We expect a ~20% contraction in EV sales in 2026 as the reduction of subsidy adversely affects unit economics," Percoco stated. Overall U.S. auto sales are projected at 15.9 million units, down 1%, with traditional combustion engine vehicles actually gaining 1% to 14.9 million units while EVs contract to just 1 million units.

The Upside Case Hasn't Disappeared

Still, this isn't a bearish call on Tesla's long-term potential. Morgan Stanley's bull case values Tesla at $860 per share—nearly 90% upside from current levels—if the company successfully navigates the EV downturn while scaling its Robotaxi program, deploying unsupervised Full Self-Driving, and ramping production of Optimus humanoid robots.

The bear case is considerably grimmer at $145 per share, representing roughly 68% downside. That scenario assumes intensifying competition, eroding margins, regulatory pushback on Tesla's vision-only autonomy approach, and market share losses in both automotive and energy businesses.

Technical Picture

From a technical perspective, Tesla is trading about 0.6% above its 50-day moving average, suggesting a relatively stable short-term trend. The 52-week range has been dramatic, stretching from $214.25 to $488.53, and the current price sits closer to the upper end of that range.

Monday's trading volume was robust at 49.1 million shares, signaling heightened interest around the downgrade. Support appears to be forming around $430, while resistance likely sits near the $447 opening price. Breaking through that resistance could signal a short-term recovery, but slipping below support might trigger further selling.

The broader outlook remains cautious given the economic headwinds facing the EV sector and the challenges Morgan Stanley highlighted in its industry forecast.

Price Action: Tesla shares were down 4.21% at $435.82 at the time of publication Monday.