The spending is going up. The margins are going down. Free cash flow is negative. And a Wall Street analyst who covers one of the most closely watched stocks in the market just published a note saying the next quarter has to be different.The note comes from Morgan Stanley. The company it covers is Tesla. Analyst Andrew Percoco has been on the Tesla account since longtime analyst Adam Jonas moved to the automotive side. His message on August 11 is direct. The long-term AI thesis is still intact. But the numbers need to start showing up, according to Investing.com.What Morgan Stanley just told Tesla TSLA investors to watchPercoco kept his Equal Weight rating and $415 price target on Tesla. The stock was trading around $330 at the time of publication. That puts the target roughly 26% above where the stock was sitting.The note says the second quarter earnings call did not change his long-term view. Tesla is positioned to lead in physical AI. That part of the thesis is not in question. What has changed is the urgency around proof. Weaker gross margins, higher research and development spending, and extended free cash flow burn have “sharpened our and investors’ focus on measurable progress across Robotaxi and Optimus,” Percoco wrote.More Tesla:Tesla sales rebound hides costly problem for investorsTesla record revenue masks cash burn, $1B SpaceX swingElon Musk, Tesla and SpaceX face serious questions from investorsPercoco took over Tesla coverage from Adam Jonas, who was the face of Morgan Stanley’s bull case on the stock for years. Jonas moved to the automotive side of the firm. Percoco’s August 11 note is his clearest statement yet on what Tesla needs to show to move the stock higher.FSD adoption reached a 55% attach rate on North American deliveries. Morgan Stanley had been modeling 25% to 30%. Investors noticed. It was the most constructive data point from the quarter. It also raises the stakes for Robotaxi. FSD is the foundation the autonomous strategy runs on.Why Tesla Robotaxi needs to prove it can scale in 2026Percoco wrote that he wants “clearer evidence that Robotaxi is scaling.” More cities is not what he is asking for. More rides per vehicle. Higher utilization. Safety standards that hold. And none of it dependent on heavy remote support or expensive hardware upgrades.Investors viewed the Robotaxi disclosures in Q2 as helpful but not enough. They want density in existing markets before they credit geographic expansion. Eight cities at low utilization is not the same business as eight cities running at high utilization. Percoco is watching the second number.Percoco wants to see ride volume, not just city count. He wants revenue per vehicle. He wants to see what the operating costs look like relative to what customers pay. And he wants to see a network that does not depend on remote human operators or hardware swaps to function. Those numbers are not public yet.Tesla has been expanding Robotaxi markets through 2026. Austin was the first city. Dallas, Houston, Miami and others followed. Morgan Stanley forecasts the fleet reaching 1,500 vehicles by year-end, ramping further to 30,000 by 2030. Fleet size matters less than fleet productivity at this stage of the business.
Morgan Stanley says Tesla’s long-term artificial-intelligence strategy remains compellingJustin/Getty Images
What Tesla Optimus must show investors beyond production talkOn Optimus, Percoco said he is “still looking for evidence beyond commentary around SOP.” SOP means start of production. Tesla has talked extensively about when Optimus production begins. Percoco wants to see what comes after that announcement.The commercial case for Optimus is not about whether Tesla can build a robot. It is about whether the robot works without constant human supervision. It is about what it costs to manufacture. It is about whether businesses will pay for it. None of those questions have been answered publicly.Tesla has said Optimus is already working inside its own factories. But working inside a factory under close supervision is different from operating at scale across multiple industrial environments. Investors want to see the second version. Commercial orders and contracts from outside Tesla would be the clearest signal that the product is ready for the real world.What Morgan Stanley is watching on Optimus:A functioning production version demonstrated publicly rather than in controlled settingsEvidence of operation inside Tesla’s own facilities without constant human oversightManufacturing cost estimates that suggest a viable commercial price pointCustomer orders or commercial contracts from outside TeslaA credible timeline for mass production tied to specific milestonesSource: Investing.comWhat Morgan Stanley’s $415 Tesla target means for TSLA stockEqual Weight is not a bearish call. Morgan Stanley sees real upside in Tesla’s AI story. It just does not think the risk-reward is strong enough to push the stock as a primary buy right now. The $415 target implies roughly 26% upside from $330. That is not a small number.The concern Percoco lays out is not about the technology. It is about the timeline between spending and results. Tesla is burning free cash flow while funding Robotaxi, Optimus, and charging infrastructure. That works if the spending visibly turns into a business. It stops working if spending keeps rising without proof of progress.Gross margins are already under pressure. Research and development costs are up. The market will tolerate that if Robotaxi rides grow, Optimus units operate, and FSD subscriptions expand. The 55% FSD attach rate is a start. The next quarter needs more of those data points.Morgan Stanley’s note is not a warning that Tesla’s AI strategy has failed. It is a checklist of what the company needs to show before the market will assign full credit for it. Investors still see meaningful upside if Tesla delivers. The question Percoco is asking is when.Related: Tesla recalls 20,000 vehicles over issue every driver hates