On March 18, according to the automotive website Electrek,Tesla CEO Elon Musk has announced that the super chip factory project Terafab will be launched this week. The plant is expected to cost US$25 billion to US$40 billion,But given that Tesla generated only $6.2 billion in free cash flow last year and saw profits decline sharply, funding is an issue.

Musk needs to raise money to build factory

Since completing its last additional issuance of shares at market price (ATM) in December 2020, Tesla has not raised funds through stock issuance. Tesla raised a total of approximately US$12 billion in three mark-to-market offerings that year.

cash conundrum

Tesla's total cash and investments at the end of 2025 is US$44.06 billion, which is a fairly strong financial reserve, but the company is about to face unprecedented funding needs.Tesla’s capital expenditures in 2026 are expected to exceed US$20 billion, which is more than double the US$8.53 billion expenditure in 2025.Tesla made it clear in its annual 10-K report that a significant increase in capital expenditures "will require us to seek additional financing beyond our operating cash flow."

What makes matters worse is the development trend of Tesla.Tesla's full-year revenue in 2025 fell by 3% to US$94.8 billion, of which revenue from the automotive business, still its core business, fell by 10% to US$69.5 billion, and net profit fell by 46% to US$3.79 billion.Operating margins plummeted to 4.6% from 7.2%, and full-year free cash flow was $6.2 billion (operating cash flow of $14.75 billion minus capital expenditures of $8.53 billion).

Musk says to launch Terafab project

Given Tesla's automotive revenue decline, there are currently no obvious catalysts that can significantly improve cash flow. If Tesla's operating cash flow in 2026 is basically the same as last year, then $20 billion in capital expenditures alone could lead to its free cash flow in 2026 of about negative $5 billion. That means Tesla will burn through more than 11% of its cash reserves before the Terafab project even breaks ground.

Big money burner: Terafab

The $20 billion capital expenditure forecast does not yet fully cover the Terafab project. Musk announced last week that "the Terafab project will be launched within 7 days" with the goal of building a 2-nanometer semiconductor manufacturing plant to produce AI chips for Tesla's autonomous driving system, Cybercab self-driving taxis and Optimus robots.

For reference, Samsung spent about $17 billion on a wafer fab in Tyler, Texas. TSMC's "Gigafab" costs US$15 billion to US$20 billion each and has a monthly production capacity of about 100,000 wafers. Although Tesla has no experience making semiconductors, Musk envisions factories that will eventually outgrow these facilities.

The concept of "Tera-scale" proposed by Musk is still vague, but he hinted that its scale will far exceed TSMC's "super large fab". Even assuming Tesla can achieve cost efficiencies, the estimated cost of its Terafab project is between $25 billion and $40 billion.

Even if Terafab's payout is spread out over several years, Tesla would still need to nearly double operating cash flow to break even on a free cash flow basis. However, looking at Tesla's current financial trajectory, there's nothing to suggest that's about to happen.

Need financing

Tesla hasn't issued shares in more than five years, its longest period as a public company. Tesla's last financing was in December 2020, when it completed a $5 billion additional issuance at market price. It was the third such round that year: It raised $2.3 billion in February, $5 billion in September, and another $5 billion in December, for a total of about $12 billion.

At the time, just weeks before the February round, Musk insisted the financing was "pointless," but 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 value soaring to more than $600 billion, making it a favorable time to issue shares at a historically high valuation. Today, Tesla's market capitalization hovers around $1.5 trillion, while the stock is under pressure from weakening fundamentals and political controversy surrounding Musk's role in the Trump administration.

Conditions are met

At present, various conditions are gradually being put in place, which may lead to Tesla's first financing since 2020.

Tesla expects capital expenditures in 2026 to exceed $20 billion, and its 10-K annual report clearly states that the company "may determine that it is best to support the rapid growth of the business by raising additional capital or seeking other sources of financing." The Terafab project will also add at least $25 billion in projected costs over the next few years. Moreover, Tesla's automotive revenue and profit margins are declining, not growing. Even without the Terafab project, free cash flow is already on track to become negative. Tesla's stock price, although well below its peak, still enjoys a valuation premium, which makes equity issuance more attractive relative to debt financing.

The mark-to-market additional issuance mechanism used by Tesla in 2020 will allow the company to gradually sell shares at the current market price, thus minimizing the impact on a single day's stock price. At the current stock price, Tesla only needs to dilute shareholders by 1-2% to raise $10 billion to $15 billion, which is almost insignificant compared to the company's huge circulating capital.