What exactly is Elon Musk planning?

Over the weekend, he tweeted that “Terafab project launches in 7 days.”

That’s about semiconductors. Musk has talked recently about Tesla’s need for enormous amounts of microchips for the millions of robo-taxis and robots he plans to produce. “If Tesla hits its long-term Optimus [humanoid robot] target (100 million-plus per year), it would require
200 million-plus chips or greater than 50 times its current demand across auto and robotaxi,” wrote Morgan Stanley analyst Andrew Percoco on Monday.

Exactly what the Terafab project will look like, however, is anyone’s guess. A semiconductor fab costs tens of billions to build. Musk could be referring to partnering with an existing semiconductor maker or to something else entirely.

Percoco believes Musk is referring to internal chip-building capacity. “Based on our recent conversations with the company, its decision to move ahead with a chip fab is tied to geopolitical concerns and increasingly tied to its Optimus program,” he added.

Timing is important. “Management has suggested that AI compute
could become a bottleneck within the next three to four years, implying that any serious effort to address this constraint would need to begin well ahead of that window.”

Micron’s Boise fab for memory chips broke ground in 2022 and is expected to start producing in 2027.

Percoco suggests Tesla could face a $35 billion to $40 billion bill for its own capacity, which, optimistically, would produce chips in 2028. Tesla typically spends less than $10 billion a year on new plants and equipment, though it plans to spend $20 billion in 2026 as it ramps up its robot ambitions.

A Tesla semiconductor fab is a “Herculean task,” says Percoco. That doesn’t mean it won’t happen. Tesla could also look to partner with existing players, providing capital for someone else’s capacity.

Whatever happens, it’s going to be big and something investors should watch out for.

Percoco, for his part, rates Tesla stock Hold and has a $415 price target.

Tesla stock was down 0.2% at $398.60 in early trading on Wednesday, while the S&P 500 and Dow Jones Industrial Average were down 0.5% and 0.8%, respectively.

Coming into Wednesday trading, Tesla stock was down 11% this year and up 77% over the past 12 months.