Alphabet investors are increasingly convinced that the company’s chips could be a key driver of Google’s parent company’s future earnings.
The success of Alphabet’s tensor processing unit (TPU) chips was the main reason for the company’s 30% rise in the fourth quarter, making it one of the best-performing stocks in the S&P 500 index. TPUs have always been seen as a major strength within the company, fueling the growth of the company’s cloud computing business. But there is growing optimism that Alphabet could start selling chips to third parties, creating a new revenue stream for a business that could eventually reach a value of nearly $1 trillion.
Shares fell 1% on Thursday.
“If companies want to diversify away from Nvidia, TPUs are a good way to do that, and that means there’s a lot of reason to be optimistic,” said Gil Luria, head of technology research at DA Davidson. “The chip business may end up being more valuable than Google Cloud. But even if you don’t sell chips externally, better chips mean a better, more efficient cloud.”
If Alphabet gets serious about selling TPUs, Luria estimates it could capture 20% of the artificial intelligence market in a few years, making it a roughly $900 billion business.
Alphabet did not respond to requests for comment. An Nvidia spokesperson pointed to CEO Jensen Huang’s recent comments about the company’s competitive advantage, saying, “As a company, we’re competing with teams, and there aren’t that many teams in the world that excel at building these incredibly complex things.”
In late October, Alphabet announced it would supply tens of billions of dollars in chips to Anthropic PBC, sending the stock up more than 6% in two days. And a month later, The Information sparked another breakthrough when it reported that Meta Platforms Inc. was in talks to spend billions of dollars for access to TPU.
A TPU is an application-specific integrated circuit (ASIC) chip. By definition, they are custom designed for a specific use case, in this case accelerating machine learning workloads. As a result, they are less flexible than Nvidia’s semiconductors, but they are also cheaper, a big advantage at a time when investors are questioning AI-related spending.
“Nvidia’s chips are much more expensive and harder to get, but if you can get an ASIC chip, Alphabet is right up there and is far ahead of the market,” said Mark Ion, equity portfolio manager at Homestead Advisors. “It doesn’t control the entire market, but it’s part of the secret sauce of stock prices.”
The value of Alphabet’s TPUs was confirmed by the launch of the company’s latest Gemini AI model. This model is highly rated and optimized to run on chip.
“Alphabet is the only company with leadership in every layer of AI,” Iong said, pointing to Gemini, Google Cloud, TPU, and several other areas. “It brings incredible benefits.”
Selling chips to third parties may be in Alphabet’s best interests, but it remains unclear how much emphasis the company places on that, Ion said. But Morgan Stanley analyst Brian Nowak sees signs of an “up-and-coming TPU sales strategy” that could ultimately boost profits.
Quoting Morgan Stanley’s Asia semiconductor analyst, Nowak predicts that approximately 5 million TPUs will be purchased in 2027, about 67% more than previously expected, and 7 million TPUs will be purchased in 2028, 120% more than previously expected. Much of this appears to be from Alphabet’s own use and sales of Google Cloud Platform, which “speaks to the potential for GOOGL to sell more TPUs,” he wrote in a Dec. 1 note to clients.
Morgan Stanley estimates that for every 500,000 TPU chips sold to third-party data centers, Alphabet could add about $13 billion to its 2027 revenue and 40 cents to its earnings per share. Based on analyst forecasts, Alphabet is expected to post sales of about $447 billion in 2027, and an additional $13 billion would increase sales by almost 3%. Consensus estimates for the company’s 2027 revenue have increased more than 6% in the past three months, according to data compiled by Bloomberg.
Of course, high hopes for Alphabet’s chip business could lead to disappointment if the upside doesn’t materialize, especially at a time when the stock’s valuation is rising. The company’s stock trades at an estimated earnings-to-earnings ratio of approximately 27 times, near its highest level since 2021 and well above the average over the past 10 years. But even at that level, Alphabet is still cheaper than big tech rivals like Apple, Microsoft and Broadcom.
Allen Bond, a portfolio manager at Jensen Investment Management, recently took advantage of rising stock prices to sell some of his holdings. However, he remains positive about the company’s overall position and outlook, including a “credible path for TPU to become a revenue driver.”
“Alphabet has shown measurable strength and progress in AI, which is increasingly valued by investors, but the valuation still looks reasonable given growth expectations.” “The fact that there is increasing evidence of AI momentum in companies trading at a discount to Microsoft and Apple means the company remains a core holding.”
