Musk Launches AI Chip Megafactory: Larger Than TSMC, Where Will $40 Billion in Funding Come From?

Tesla CEO Elon Musk has announced that they will launch the Terafab superchip factory project this week. The factory is expected to cost between $25 billion and $40 billion, but given that Tesla only generated $6.2 billion in free cash flow last year and profits have significantly declined, funding is a concern.

Since completing its last at-the-market (ATM) stock offering in December 2020, Tesla has not raised funds through stock issuance. During those three ATM offerings in 2020, Tesla raised approximately $12 billion.

Cash Flow Challenges

Tesla’s total cash and investments amounted to $44.06 billion at the end of 2025, which is a substantial reserve. However, the company is about to face unprecedented capital needs. Tesla’s capital expenditures for 2026 are expected to exceed $20 billion, more than doubling the $8.53 billion spent in 2025. Tesla explicitly stated in its 10-K annual report that the significant increase in capital spending “will require us to seek additional financing outside of operating cash flow.”

Adding to the difficulty is Tesla’s recent performance trend. In 2025, total revenue declined 3% to $94.8 billion, with the core automotive business revenue dropping 10% to $69.5 billion. Net profit fell 46% to $3.79 billion, operating profit margin dropped from 7.2% to 4.6%, and free cash flow for the year was $6.2 billion (operating cash flow of $14.75 billion minus capital expenditures of $8.53 billion).

Given the decline in Tesla’s automotive revenue and the lack of clear catalysts to significantly improve cash flow, if Tesla’s operating cash flow in 2026 remains roughly the same as last year, then just $20 billion in capital expenditure could result in a free cash flow of approximately negative $5 billion in 2026. This means Tesla would deplete over 11% of its cash reserves even before the Terafab project breaks ground.

Major Cash Burn: Terafab

The $20 billion capital expenditure estimate does not fully cover the Terafab project. Musk announced last week that “Terafab will be launched within 7 days,” aiming to build a 2-nanometer semiconductor manufacturing plant to produce AI chips for Tesla’s autonomous driving system, Cybertruck autonomous taxis, and the Optimus robot.

For comparison, Samsung’s wafer plant in Taylor, Texas, cost about $17 billion. TSMC’s “Gigafab” costs between $15 billion and $20 billion, with a monthly capacity of about 100,000 wafers. Although Tesla has no semiconductor manufacturing experience, Musk envisions a plant scale that will eventually surpass these facilities.

The “Tera-scale” concept Musk proposed remains somewhat vague, but he hinted that its scale will far exceed TSMC’s “Gigafab.” Even assuming Tesla can achieve cost efficiencies, the estimated cost of the Terafab project ranges from $25 billion to $40 billion.

Even if the expenses are spread over several years, Tesla would need to nearly double its operating cash flow to break even on free cash flow. However, based on Tesla’s current financial trajectory, there are no signs this will happen soon.

Need for Financing

Tesla has not issued stock for over five years, the longest period since its IPO. The last financing was in December 2020, when it completed a $5 billion at-the-market offering. That was the third such offering that year: $2.3 billion in February, $5 billion in September, and another $5 billion in December, totaling about $12 billion.

At that time, just weeks before the February offering, Musk insisted that financing was “completely pointless,” but he later changed his stance. The $12 billion Tesla raised in 2020 was used to fund the Texas Gigafactory and other expansion projects.

These financings coincided with Tesla’s market cap soaring above $600 billion, making it a favorable time to issue stock at a historically high valuation. Today, Tesla’s market cap hovers around $1.5 trillion, with its stock price under pressure from weakening fundamentals and political controversy surrounding Musk’s role in the Trump administration.

Conditions Are Coming Together

Currently, conditions are gradually aligning that could lead Tesla to its first financing since 2020.

Tesla expects capital expenditures in 2026 to exceed $20 billion, and its 10-K report explicitly states that the company “may consider raising additional capital or seeking other financing options to support rapid growth.” The Terafab project is expected to add at least another $25 billion in costs over the next few years. Meanwhile, Tesla’s automotive revenue and profit margins are declining rather than growing. Even without the Terafab project, free cash flow is already trending toward negative territory. Despite Tesla’s stock being well below its peak, it still enjoys a valuation premium, making equity issuance more attractive than debt financing.

Tesla’s use of the ATM mechanism allows the company to gradually sell shares at current market prices, minimizing impact on the stock price. Based on current share prices, Tesla could raise $10 billion to $15 billion by diluting only 1-2% of its shares, which is negligible given its large float.