Tesla says EV orders surged as gas prices spiked, but capex and FSD hurdles loom

At a glance:

• Tesla reports a "resurgence" in global demand and its highest Q1 order backlog in two years, attributing part of the boost to soaring gas prices following the U.S.–Iran conflict.
• The company expects to spend over $25 billion in capital expenditures this year, up from $8.5 billion last year, with major investments planned for the new Terafab chip factory.
• CEO Elon Musk admitted that vehicles equipped with Hardware 3 cannot achieve unsupervised full self-driving, requiring a trade-in or computer upgrade program.

Demand resurgence amid energy crisis

On Wednesday, Tesla reported a "resurgence" in global demand, including a "slight growth in the United States," and its highest first-quarter order backlog in two years. This growth comes despite the significant challenges posed by the Trump administration's removal of tax credits for the American EV industry. According to Tesla CFO Vaibhav Taneja, a major factor contributing to the uptick in orders was the dramatic increase in gas prices following the war between Iran and the United States.

The catalyst for the energy shock occurred shortly after the U.S. struck Iran on February 28th. In response, Iran closed most traffic through the Strait of Hormuz, a critical oil chokepoint. This action effectively debilitated the global oil trade and sent gas prices soaring worldwide. The resulting turmoil has been described by energy experts as "the largest energy crisis we have ever faced," creating a market environment where the vulnerabilities of gas-powered vehicles are laid bare.

While high gas prices have strained most industries, early evidence suggests the EV sector stands to benefit as consumers seek alternatives to volatile fuel costs. As of this writing, gas prices remain elevated and are projected to stay that way for the foreseeable future. Although Trump announced an indefinite ceasefire in Iran this week, the decision has not yet reopened traffic through the Strait of Hormuz. Experts predict it will take months for oil prices to normalize, even after the waterway is fully operational again.

The capital expenditure surge

Despite the positive demand signals, Tesla faces significant financial headwinds due to an massive increase in capital expenditure. The company is expecting to shell out more than $25 billion this year. This represents a staggering jump from the roughly $8.5 billion spent last year and is significantly higher than the $20 billion the company projected just a quarter ago for 2026.

"With 2026, we’re going to be substantially increasing our investments in the >>future, so should expect to see a very significant increase in capital expenditures," Tesla CEO Elon Musk said. He noted that Tesla is not alone in this trend, pointing out that most major technology companies are substantially increasing their capital investments. However, the last round of tech earnings revealed an eye-popping increase in capex across the board, which has left investors more freaked out than excited.

The AI-focused market is beginning to contend with the reality that gigantic spending with no clear sight of sufficient short-term demand might be dangerous for the broader economy. Tesla's commitment to spending over $25 billion places it at the center of this industry-wide gamble on future technology. Investors are now watching closely to see if the infrastructure and product developments funded by this capex will materialize into profitable ventures or become a drag on the company's financial health.

Terafab and the chip ambitions

A significant portion of Tesla’s financial commitment is directed toward Elon Musk’s ambitious plans for a new chip factory. The first major initiative is the Terafab, a giant chip manufacturing plant that Tesla and SpaceX will helm jointly in Texas. Musk originally announced the initiative last month, laying out plans to build chips for both land and space applications, despite the companies lacking the deep expertise traditionally required for semiconductor fabrication.

During the call on Wednesday, Musk clarified that Tesla will be the primary entity building out the research fab, not SpaceX. He currently estimates the cost of this project to be "$3 billion-ish." Musk has positioned the Terafab as a necessary response to a shortage of chips required for his companies' operations. However, he also made promises suggesting the facility aims to achieve more than just self-sufficiency.

"We just anticipate hitting the wall if we don’t make chips ourselves, so that’s the reason for the Terafab," Musk said. He added a bold vision for the project: "I think that we do have some ideas for how to make, maybe, radically better AI chips. These are kind of research ideas, which means long shot, but if long shot pays off, it’s maybe a giant improvement." This move represents a vertical integration strategy that could redefine Tesla's supply chain if successful.

Hardware 3 limitations and FSD reality

The second major commitment involves the long-promised goal of full self-driving (FSD). For years, Musk has promised Tesla owners unsupervised full self-driving, claiming the capability was just around the corner. However, the company has faced criticism and legal action from customers worldwide who feel misled by these unfulfilled promises, especially given the conflicting remarks from Musk and his CFO regarding the timeline.

In a significant admission during the call, Musk finally conceded that Teslas currently fitted with the Hardware 3 computer will not be able to achieve unsupervised full self-driving. "Hardware 3 simply does not have the capability to achieve unsupervised FSD," Musk stated. "We did think at one point it would have that, but relative to hardware 4, it has only 1/8 of the memory bandwidth." This acknowledgment marks a departure from previous assurances that existing hardware would be sufficient for autonomous capabilities.

To address this hardware gap, Musk suggested that Tesla will offer owners of Hardware 3 vehicles a "discounted trade-in" and a computer upgrade. Implementing this efficiently requires a new logistical approach. "To do this efficiently, we’re going to have to set up, like, kind of micro factories, or small factories in major metropolitan areas," Musk claimed. He explained that performing these upgrades solely at service centers would be extremely slow and inefficient, necessitating many production lines to handle the volume of changes required for the existing fleet.