Tesla stock is up around 1% today: can the recovery sustain?

Tesla shares TSLA edged higher on Tuesday as investors weighed progress toward reopening the Strait of Hormuz, a new vehicle recall, and Wall Street's continued focus on the company's Robotaxi and artificial intelligence initiatives.

Tesla stock rose 1.2% to $334.35 in early trading.

The broader market was little changed. The S&P 500 gained 0.1%, while the Nasdaq Composite traded around the flatline and the Dow Jones Industrial Average added 50 points, or 0.1%.

Investors were weighing signs of progress toward reopening the Strait of Hormuz against lingering doubts that the US and Iran can reach a broader resolution to the conflict.

Tesla shares rose last week but remain down 23% for the year amid concerns about declining profitability and the company's heavy spending on artificial intelligence.

Tesla faces new vehicle recall

The US National Highway Traffic Safety Administration said Tuesday that Tesla is recalling 20,349 vehicles in the US over low-beam headlights that may be excessively bright.

The regulator said the issue could reduce visibility for oncoming drivers and increase crash risk.

The recall affects certain Model 3 and Model Y vehicles. NHTSA said a remedy has not yet been finalized.

The recall adds to regulatory scrutiny surrounding Tesla's vehicle safety.

In July, NHTSA opened a preliminary investigation into about 1.2 million Tesla vehicles following reports of suspension failures that could potentially cause a loss of steering control.

The latest recall did not appear to weigh significantly on Tesla shares in early trading.

Robotaxi remains key to investor confidence

Morgan Stanley said Tuesday that Tesla needs to provide clearer evidence that its Robotaxi business is scaling to strengthen investor conviction in the company's longer-term strategy.

Analyst Andrew Percoco said investors remain constructive on Tesla's "Physical AI" opportunity, supported by stronger adoption of its Full Self-Driving software.

"Recent feedback suggests investors remain constructive on TSLA’s Physical AI opportunity, supported by stronger FSD adoption."

However, he said stronger conviction "will require clearer evidence that Robotaxi is scaling and more tangible Optimus proof to support the ROI on elevated capex."

Morgan Stanley said the latest quarterly results did not materially change its long-term view that Tesla is positioned to lead in Physical AI.

At the same time, weaker gross margins, higher research and development spending, and continued free cash flow use have "sharpened our (and investors’) focus on measurable progress across Robotaxi and Optimus."

FSD adoption provides a positive signal

Morgan Stanley highlighted stronger-than-expected adoption of Tesla's Full Self-Driving software as one of the more constructive developments from the company's recent results.

The firm maintained its equalweight rating on the stock.

The firm said FSD had a 55% attach rate on North American deliveries, substantially above its previous expectation of 25% to 30%.

The comments underscore the challenge facing Tesla as it seeks to justify elevated investment in autonomy and robotics.

While FSD adoption is providing evidence of demand for its AI software, investors are looking for more measurable progress from Robotaxi and Optimus before assigning greater value to those businesses.