On Thursday, Morgan Stanley downgraded Tesla to "underweight" from "equal-weight." It's the first time the bank has recommended selling Tesla since 2012.The downgrade comes amid a record rally for Tesla. At the stock's current valuation, Morgan Stanley sees more downside risk than upside, according to the Thursday note.Shares of Tesla fell as much as 4% in early trading Thursday.Watch Tesla trade live on Markets Insider.Morgan Stanley just downgraded shares of Tesla to "underweight," the equivalent of a sell rating, for the first time in more than seven years.The Thursday downgrade comes after a record rally where Tesla gained more than 100% in just four months on solid 2019 vehicle delivery numbers and optimism around its factory in China. The last time Morgan Stanley recommended selling the electric-car maker was in September 2012, according to Bloomberg data."Near-term momentum and sentiment around the stock is admittedly very strong, but we ultimately question the sustainability of the momentum," Adam Jonas of Morgan Stanley wrote in a Thursday note. He also lowered his valuation for the company's mobility unit and increased his expectations for the core auto business, resulting in a higher target price.At Tesla's current valuation, Jonas sees more downside risk for the stock than upside. Even the firm's boosted price target of $360 from $250 implies 30% downside from where Tesla shares traded at Wednesday's close.Jonas also said he thinks that optimism around China has been fully priced into Tesla's stock, while the risks for the world's largest electric-vehicle market are not fully appreciated."We continue to harbor concerns whether an auto business commercializing advanced, dual-purpose technology in economically sensitive industries could be a long-term winner in the Chinese market," he wrote, noting that this concern applies to all original equipment manufacturers, or OEMs, under Morgan Stanley coverage.Still, Tesla deserves credit, and should "be among the world's most valuable auto companies," Jonas wrote. But Tesla's importance in the auto industry aside, "we think investors will be presented with more attractive opportunities to own the stock in the future," Jonas wrote.Shares of Tesla traded down as much as 4% Thursday morning. So far in 2020, the stock has gained 24% though Wednesday's close. Even amid the record rally, there's a strong bear case against Teslathis week it overtook Apple as the most shorted US stock, and at least 16 analysts have bearish ratings on the equity, according to Bloomberg data.Read more: A Wall Street firm names 9 stocks that look like big winners as earnings get underwayand 9 more that could be headed for a plungeJoin the conversation about this storyNOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption Click here to read full news..