The recent note from Morgan Stanley regarding Tesla’s performance has raised concerns among investors. The company’s spending is increasing while margins are decreasing, leading to negative free cash flow. Analyst Andrew Percoco, who has taken over Tesla coverage from Adam Jonas, emphasized the need for tangible results in the next quarter.
Percoco’s Equal Weight rating and $415 price target on Tesla reflect a cautious optimism, with the stock trading around $330 at the time of the note. He acknowledges Tesla’s potential to lead in physical AI but highlights the urgency for the company to demonstrate progress in key areas such as Robotaxi and Optimus.
The second quarter earnings call did not alter Percoco’s long-term outlook on Tesla’s AI strategy. However, he emphasized the importance of showing measurable progress in terms of stronger gross margins, reduced free cash flow burn, and increased focus on Robotaxi and Optimus.
Investors are closely monitoring Tesla’s progress in scaling its Robotaxi operations. Percoco stressed the need for clear evidence of scalability, including higher utilization rates, safety standards, and reduced dependency on remote support or costly hardware upgrades.
On the Optimus front, Percoco is looking for more than just production announcements. He wants to see evidence of the robot’s functionality without constant human supervision, manufacturing cost estimates, and commercial orders from external entities.
The $415 price target set by Morgan Stanley implies a potential 26% upside for Tesla’s stock. While the firm recognizes the upside potential in Tesla’s AI story, the concern lies in the timeline between spending and results. Tesla’s continued spending on projects like Robotaxi and Optimus must translate into viable business outcomes to reassure investors.
Overall, Morgan Stanley’s note serves as a checklist for Tesla to demonstrate tangible progress before the market fully acknowledges the company’s AI strategy. Investors remain optimistic about Tesla’s potential but are looking for concrete results in the upcoming quarters to validate their confidence.
