Tesla is simultaneously exploring partnerships with Chinese solar manufacturers while scouting locations for a new factory in the United States. What is the vision behind Elon Musk's ambitious space-based solar plan? A recent research report from Morgan Stanley provides an in-depth analysis of Tesla's announcement to build 100 GW of vertically integrated solar manufacturing capacity. The firm argues this plan is not merely an entry into the terrestrial solar market but is strategically aimed at securing energy supply chain security amid geopolitical tensions and supporting Musk's long-term goal of establishing space data centers. This initiative is also expected to create deep synergies with Tesla's existing energy storage business. The report indicates this solar expansion could add $25 to $50 billion in equity value to Tesla's energy division, equating to $6 to $14 per share, and boost the segment's valuation by 35%, representing another significant pillar in Tesla's diversified growth strategy.
The analysis identifies two core rationales behind Tesla's large-scale solar capacity investment, both pointing to long-term energy and space strategy rather than short-term market expansion. First, there is a need for energy supply chain autonomy due to geopolitical factors. Over 75% of global solar manufacturing capacity is concentrated in China and Southeast Asia, while the U.S. supply chain shows significant structural imbalances: upstream capacity for ingots, wafers, and cells is under 10 GW, with only module assembly reaching 65 GW. In contrast, annual U.S. utility-scale solar demand stands at 30-40 GW. Musk emphasized during Tesla's Q4 earnings call that geopolitical issues pose serious threats to critical supply chains. Vertical integration in solar manufacturing would allow Tesla to reduce dependence on external suppliers and synergize with its leading energy storage business, creating a complete "solar plus storage" energy supply chain and avoiding future energy-related bottlenecks.
Second, demand from space data centers far exceeds that of the terrestrial market. Morgan Stanley estimates the U.S. utility-scale solar market demand at only 30-40 GW annually, indicating that Tesla's 100 GW capacity plan is not primarily designed for ground-based applications. Instead, the majority of this capacity is intended for space-based solar-powered data centers, with a smaller portion supplementing the U.S. utility-scale market to complement its storage business. This direction aligns with Musk's space strategy, positioning solar-powered space data centers as a key future application and the primary use case for Tesla's solar production capacity.
From a global and U.S. supply-demand perspective, Tesla's solar strategy enters a differentiated market environment, making the focus on space applications more logical. Global solar manufacturing capacity currently exceeds 1000 GW, while annual global demand is only about 625 GW, indicating significant oversupply and intense competition that pressures traditional solar manufacturers' profits. The U.S. market, however, maintains a relatively balanced supply-demand dynamic due to tariffs and trade investigations, providing a supplementary market for Tesla's ground-based solar output. Nonetheless, this market is too small to absorb 100 GW of capacity. This landscape suggests that focusing solely on the terrestrial market would expose Tesla to global oversupply pressures, whereas targeting the undeveloped space data center sector allows it to avoid saturated competition while aligning with its space strategy for a differentiated advantage.
Financially, the construction of 100 GW of solar capacity will require substantial capital expenditure, but long-term revenue and profit potential are significant, supported by U.S. manufacturing tax credits that will substantially lower operating costs. The capital expenditure for this project is not included in Tesla's guidance of over $20 billion in capex by 2026. The scale of investment depends on the technological approach: full vertical integration, from raw materials to finished panels, would require $30 to $70 billion, while focusing solely on cell manufacturing could reduce capex to $15-20 billion. Tesla has indicated it will pursue full vertical integration, implying a major investment in capacity build-out.
Morgan Stanley's phased financial projections for Tesla's solar business indicate a "slow start, rapid acceleration" pattern, with a profitability inflection point reached at full 100 GW capacity in 2030. Capacity is expected to reach 10 GW by 2027, 25 GW by 2028, 75 GW by 2029, and 100 GW by 2030. Assuming an average selling price of $0.25 per watt, in line with U.S. utility-scale panel prices, full capacity would generate $25 billion in annual revenue by 2030, far exceeding the energy storage business's projected $13 billion revenue for 2025. Profitability would initially be negative, with a -15% gross margin and -35% EBIT margin in 2027 due to lack of scale, improving to a 22.5% gross margin and 15% EBIT margin at full capacity, yielding annual EBIT of $3.75 billion and becoming a key profit driver for the energy business.
U.S. manufacturing tax credits provide crucial financial support. The report calculates that with full vertical integration covering wafers, cells, and modules, Tesla could receive a tax credit of $0.17 per watt, totaling $17.25 billion annually for 100 GW of capacity. Even focusing only on cell manufacturing could yield roughly $4 billion in annual credits while significantly reducing capex. This policy benefit would substantially offset initial costs and accelerate the path to profitability.
Technologically, Tesla's focus on serving space data centers means it will likely diverge from mainstream crystalline silicon technology used by traditional solar manufacturers. Space applications require panels with higher resistance to extreme environments, greater energy conversion efficiency, and lighter weight—specifications that conventional silicon technology struggles to meet. Tesla is expected to develop new solar technology tailored for space data center power needs, which could form a core technical barrier for its solar business. The specific technology path has not yet been disclosed, and its development will be critical to the capacity build-out and application.
From a valuation perspective, the solar initiative significantly enhances the energy division's worth while removing energy supply chain obstacles for Tesla's long-term growth. Morgan Stanley currently values Tesla's energy business at $140 billion, or $40 per share, accounting for approximately 10% of the $415 price target. At full capacity, the solar business could add $25-50 billion in equity value, boosting the energy segment's valuation by 35%, or $6-14 per share. While the solar business's direct impact on overall valuation is modest, the vertically integrated "solar plus storage" supply chain enables Tesla to overcome energy constraints, supporting long-term expansion in automotive, robotics, and space data centers, and preventing supply chain bottlenecks from hindering growth. The firm emphasizes that the core value of this investment lies not in short-term valuation uplift but in value creation and growth opportunities, marking a crucial step in Tesla's diversification strategy. The $415 price target comprises five segments: core auto business at $45 per share, network services at $145, Tesla Mobility at $125, and energy at $40. The realization of the solar business will make the energy division a major growth driver within this valuation framework.
Looking ahead, Tesla has begun selecting sites for its solar manufacturing base. Further details on capacity construction are expected in upcoming quarterly earnings calls. Key future milestones include the announcement of the specific solar technology path, progress on space data centers, synergy realization between solar and storage operations, and the implementation of tax credit policies. These factors will be critical for market focus and the value realization of Tesla's solar business. The 100 GW solar capacity plan is not a simple market entry but a long-term strategic move centered on energy supply chain autonomy and space strategy within a geopolitical context. While facing challenges including massive capital expenditure, technology development, and commercial deployment, with near-term profitability pressure, the long-term outlook suggests it will not only expand the energy division's valuation and profits but also build a complete energy supply chain to power Tesla's automotive, robotics, and space data center ventures, forming a foundational element of its diversified development. For Tesla, the solar business's value extends beyond financial metrics to eliminating energy supply chain bottlenecks for its broader strategy. For the market, Tesla's entry expands the solar industry's application horizon from terrestrial to space, opening new imaginative possibilities for the sector's future.