Investors in Alphabet are growing increasingly confident that the company's semiconductor operations may emerge as a major future revenue driver for Google's parent company.
The success of Alphabet’s tensor processing unit (TPU) chips has notably contributed to the stock’s 31% rise in the fourth quarter, ranking it as the tenth best performer in the S&P 500 Index. Internally considered a significant asset, the TPUs have propelled growth in Alphabet’s cloud-computing division. Now, there is rising anticipation that Alphabet might commence selling these chips to external parties, potentially creating a new revenue stream valued at nearly a trillion dollars.
“If companies want to diversify away from Nvidia, TPUs are a good way to do it, 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 could ultimately be worth more than Google Cloud. But even if it never sells a chip externally, the better chip means a better, more efficient cloud.”
Should Alphabet decide to market its TPUs aggressively, Luria forecasts that the company could capture 20% of the artificial intelligence market in several years, potentially leading to a business worth approximately $900 billion.
While Alphabet did not respond to requests for comments, a spokesperson for Nvidia highlighted recent remarks by CEO Jensen Huang, emphasizing the company's competitive edge: “As a company, you’re going up against teams, and few teams in the world excel at creating such complex products.”
In late October, Alphabet announced it would supply tens of billions of dollars' worth of chips to Anthropic PBC, triggering a two-day 6% surge in its stock. A month later, reports surfaced that Meta Platforms was negotiating to spend billions to gain access to TPUs, sparking another stock price jump.
TPUs, application-specific integrated circuits (ASICs), are custom-designed to accelerate machine learning workloads. This specialization makes them less flexible but cheaper compared to Nvidia Corp.'s semiconductors, rendering them an appealing option during times when AI-related spending is under scrutiny by investors.
“Nvidia chips are much more costly and hard to get, but if you can use an ASIC chip, Alphabet is right there, and it leads that market by far,” said Mark Iong, equity portfolio manager at Homestead Advisers. “It won’t control the entire market, but this is part of the secret sauce for the stock.”
The value of Alphabet’s TPUs has been validated through the successful launch of its latest Gemini AI model, which received widespread acclaim and is optimized for these chips.
“Alphabet is the only company with leadership in every layer of AI,” Iong said, pointing to Gemini, Google Cloud, the TPUs and several other areas. “That gives it an incredible advantage.”
Although selling chips to third parties could greatly benefit Alphabet, the extent of its commitment to such a strategy remains uncertain, according to Iong. However, Morgan Stanley analyst Brian Nowak perceives early signs of a “developing TPU sales strategy” that could enhance revenue.
Nowak referenced Morgan Stanley’s Asia semiconductor analyst, who anticipates around five million TPUs being purchased in 2027, a 67% increase from earlier estimates, and seven million in 2028, up 120% from prior forecasts. Most of these sales are expected to come from Alphabet’s internal use and Google Cloud Platform, but this indicates a broader market potential for selling TPUs.
Based on Morgan Stanley’s projections, every 500,000 TPU chips sold to a third-party data center could add roughly $13 billion to Alphabet’s 2027 revenue and 40 cents to its earnings per share. Analysts project that Alphabet could generate around $447 billion in revenue by 2027, meaning an additional $13 billion would reflect a nearly 3% increase. In fact, consensus estimates for the company’s 2027 revenue have risen by over 6% in the last three months, as compiled by Bloomberg.
Despite the high expectations for Alphabet’s chip business, there is a risk of disappointment if these prospects fail to materialize, especially given the stock’s high valuation. Currently, shares trade at roughly 27 times estimated earnings, the highest since 2021 and significantly above their 10-year average. Nonetheless, Alphabet remains more affordable compared to Big Tech peers like Apple Inc., Microsoft Inc., and Broadcom Inc.
Allen Bond, portfolio manager at Jensen Investment Management, has recently leveraged the stock’s rally to reduce some of his stakes. Yet, he continues to hold a favorable outlook on the company’s overall position and potential, including the promising revenue prospects of TPUs.
“Alphabet is showing tangible strength and progress with AI, and while that’s increasingly appreciated by investors, the valuation still looks reasonable given growth expectations,” he said. “The fact that we have increased evidence of AI momentum at a company that trades at a discount to Microsoft and Apple means it remains a core holding.”
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