Tesla's stock rises as investors embrace ambitious foray into making AI chips

By William Gavin

Elon Musk's planned chip fab could cost hundreds of billions of dollars, according to analysts

Tesla CEO Elon Musk has said the company's chip partners, including TSMC, won't be capable of meeting its needs.

Tesla was already set to make 2026 its costliest year on record - by far. And that was before factoring in a big project that's drawing nearer.

"Terafab Project launches in 7 days," Musk said in a post on X over the weekend. That sets Tesla (TSLA) up to begin developing a manufacturing facility capable of making logic and memory chips, as well as packaging.

Tesla's stock rose 1.1% on Monday. Shares have fallen 16% over the past three months.

The company said in January that it projected capital expenditures of more than $20 billion for 2026, excluding costs associated with a solar factory or the Terafab. Previously, its most expensive year was 2024, when capex topped $11 billion.

Musk has often mused that scaling energy and chip production is the biggest factor that would limit the growth of Tesla and determine the outcome of the AI race. The company is investing in solar-energy manufacturing, which analysts say could cost Tesla up to $70 billion. It's also betting on the Terafab to help ensure compute supply.

Tesla will need more of its next-generation chips than what can be produced by partners Samsung Electronics (KR:005930), Taiwan Semiconductor Manufacturing (TW:2330) and Micron Technology (MU), Musk has said. In November, he also floated a potential collaboration with Intel (INTC) to produce its chips.

Intel declined to comment.

See: How Tesla can turn energy into a nearly $200 billion business

TSMC and Samsung told Musk it would take about five years to develop a new chip fab and begin production, Musk told billionaire investor Ron Baron last November. Both Tesla and SpaceX work with the firms.

"Five years for me is eternity. My timelines are one year, two years," Musk said, adding that it would be "great" if Samsung and TSMC say they can move faster and provide "us with 100, 200 billion AI chips a year in the time frame that we need them."

UBS analyst Joseph Spak estimated in January that Terafab could cost an initial $30 billion - more than Tesla's planned capex for all of 2026. To reach Musk's goal for production capacity, Tesla may need to spend as much as $300 billion, he said. Capex could stay elevated at $18 billion per year for a while, Spak added.

Tesla's free cash flow could turn negative this year for the first time since 2018, analysts have predicted. Wall Street expects negative FCF of $4.1 billion for 2026, according to the FactSet consensus, as the company enters what Spak called "cash-burning mode."

"Big dreams require big risk, and the timing of when the payoff might be for some of these ventures becomes critically important," Spak wrote in a note to clients.

Read: Tesla could slide back into cash-burn mode as Elon Musk pursues his costly AI vision

When Musk first publicly mentioned the idea of a Terafab last November, he said it would initially be capable of making 100,000 wafer starts per month and eventually scale to produce about 1 million per month. Market leader TSMC's combined output stood at more than 1.4 million 12-inch equivalent wafers each month in 2025, according to its website.

Musk has said Tesla's next-gen chip, the AI5, will go into volume production in 2027. It is intended to be smaller than rivals while offering performance boosts. Often, smaller designs allow companies to produce more chips per wafer.

"We're going for radical simplicity," Musk said last October. "The net effect is that I think AI5 will be the best performance per watt, maybe by a factor of two or three, and best performance per dollar for AI, maybe by a factor of 10" compared with rival chips.

The AI5 chip is expected to be used for Tesla's electric vehicles, humanoid robots and data centers, Musk has said. Tesla's timeline likely means its first robotaxis won't have the chips, since the Cybercab is set to enter volume production next month.

-William Gavin

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03-16-26 1608ET