Tesla and SpaceX Committed $16.8 Billion to One Chip Plant. Tesla's Entire Annual Profit Is $3.8 Billion.

Tesla (NASDAQ: TSLA) and SpaceX (NASDAQ: SPCX) said on Aug. 6 that they will spend $16.8 billion on the first phase of Terafab, a semiconductor plant in Grimes County, Texas. Tesla's net income over the past 12 months was about $3.8 billion -- so the two companies' opening commitment alone is more than four times what Tesla currently earns in a year.

Image source: Tesla.

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The plan is enormous even by chip-industry standards. Terafab is designed to put logic, memory, packaging, and testing under one roof, across more than 100 million square feet, about an hour northwest of Houston. The companies say the site will draw water from the Gibbons Creek Reservoir rather than local groundwater.

The chips are meant for Tesla's Optimus robots and its Cybercab, plus the high-power processors SpaceX wants for space-based data centers. Elon Musk is CEO of both companies, and Tesla said on X that it and SpaceX will need far more chips than current and future global production can supply.

What neither company has said is how the bill divides. The announcement attributes the $16.8 billion to the two companies jointly. And the first phase is only the start -- the project has been described in SpaceX's Texas tax-incentive filings as a multiphase plan that could reach $119 billion.

But even a half share would be a large number against Tesla's current results. For perspective, Tesla spent about $12.9 billion on capital expenditures over the past 12 months, generated $5.8 billion of free cash flow, and earned $3.8 billion of net income.

An $8.4 billion share of phase one would equal about two-thirds of a full year's capital spending, layered on top of the vehicle programs and artificial intelligence (AI) infrastructure that spending already covers.

Tesla can write the check. The company finished the second quarter with about $43.5 billion of cash and investments on hand, so the balance sheet can absorb a project like this. The strain shows up first in cash flow, and only later in earnings, as depreciation on a plant that size runs through an already thin profit base.

And the chips Terafab is built to make are mostly for products that don't ship at scale yet: Optimus and Cybercab on Tesla's side, orbital data centers on SpaceX's. The plant is a bet that those businesses grow large enough to absorb its output.

Tesla's market capitalization is about $1.3 trillion, roughly 340 times its trailing earnings. The stock, in other words, already assumes those businesses arrive. In that sense, the commitment is consistent -- a company priced for a robot-and-autonomy future is now spending like one.

Tesla can afford phase one. The earnings that would justify it, however, are still ahead.

Daniel Sparks has clients with positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.