Google AI Chips, The Revenue Engine Behind the Stock Rally
- Alphabet's custom Tensor Processing Units (TPUs) are driving a major stock rally
- Major deals with companies like Anthropic and potentially Meta signal that the market is seeking cost-effective alternatives to Nvidia's expensive hardware
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| Image From Google Blog |
Alphabet Inc. is quietly sitting on a goldmine that has little to do with search advertising or YouTube. Investors are waking up to the reality that the company's custom semiconductors could be the next massive revenue engine for Google’s parent. This hidden asset is the Tensor Processing Unit or TPU. It is a specialized chip designed specifically to handle machine learning workloads. The success of this hardware is a primary reason the stock has rallied 31% in the fourth quarter. It marks the company's tenth best performance in the S&P 500 Index.
The TPU has always been a strategic internal asset. It powers the massive data centers that run everything from Google Search to the new Gemini AI models. However the conversation is shifting from internal efficiency to external sales. Optimism is rising that Alphabet could start selling these chips directly to third parties. Gil Luria is the head of technology research at DA Davidson and he believes this business could eventually rival Google Cloud in value. He estimates that if Alphabet gets serious about selling silicon it could capture 20% of the AI hardware market. That would create a business line worth roughly $900 billion over a few years.
Market dominance in this sector is currently held by Nvidia. Their chips are the gold standard for flexibility and power. But they are also incredibly expensive and difficult to obtain due to supply shortages. This creates an opening for Alphabet. TPUs are Application Specific Integrated Circuits or ASICs. They are less flexible than Nvidia’s general purpose graphics units but they are often faster and cheaper for specific AI tasks. Investors concerned about the ballooning costs of AI infrastructure see this efficiency as a game changer.
Real world momentum is already building behind this thesis. Alphabet announced in late October that it will supply tens of billions of dollars worth of chips to Anthropic PBC. That news alone sent the stock on a two day rally of more than 6%. A month later reports surfaced that Meta Platforms Inc. is in talks to spend billions for access to these same TPUs. This sparked another leap in share price. These deals prove that major tech players are looking for alternatives to Nvidia and Alphabet is ready to fill that void.
The launch of the Gemini AI model further validated the hardware's capability. The model received glowing reviews and is optimized to run specifically on TPU architecture. Mark Iong is an equity portfolio manager at Homestead Advisers and he notes that Alphabet is now the only company with leadership in every layer of the AI stack. They own the chip and the cloud infrastructure and the model itself. This vertical integration gives them an incredible advantage over competitors who must piece together solutions from different vendors.
Morgan Stanley analysts are already crunching the numbers on what a full scale sales strategy looks like. Their Asia semiconductor analyst expects five million TPUs to be bought in 2027. That figure is up roughly 67% from previous estimates. The projection for 2028 is even higher at seven million units. Brian Nowak from Morgan Stanley wrote in a note to clients that a "budding TPU sales strategy" is emerging. He calculates that every 500,000 chips sold to a third party data center could add about $13 billion to Alphabet's annual revenue.
The valuation of the stock reflects these high hopes. Shares are trading at around 27 times estimated earnings. This is the highest level since 2021 and sits well above the 10 year average. Yet Alphabet remains cheaper than many of its Big Tech rivals like Apple and Microsoft. This relative discount makes it an attractive hold for portfolio managers like Allen Bond of Jensen Investment Management. He sees a credible path to the chips becoming a major revenue driver.
Nvidia remains confident in its competitive moat. CEO Jensen Huang emphasizes the sheer complexity of building these systems. He notes that there are very few teams in the world capable of executing at this level. But the market is hungry for diversification. Companies want options to reduce their reliance on a single supplier. Alphabet offers a compelling alternative that is already proven at scale.
The potential for disappointment exists if execution falters. The stock is priced for perfection and any stumble in the chip strategy could lead to a sharp correction. But the narrative has undeniably shifted. Alphabet is no longer just a software and ads company. It is emerging as a hardware titan with a secret sauce that could be worth nearly a trillion dollars. The race to monetize AI is just beginning and Google’s custom silicon may ultimately decide who wins