Google's custom AI chip, the TPU, is being regarded as a significant future revenue source. Market expectations suggest that by selling to external clients such as Anthropic and Meta, the TPU could capture 20% of the market dominated by NVIDIA, generating nearly USD 900 billion in business opportunities. Google's stock price surged 31% in the fourth quarter, making it the tenth-best performing component in the S&P 500 index.
Investors are increasingly convinced that $Alphabet-A (GOOGL.US)$ / $Alphabet-C (GOOG.US)$ the artificial intelligence chips under its umbrella may become a significant revenue source for its parent company in the future. This custom chip, regarded as Google's "secret weapon"—the Tensor Processing Unit (TPU)—is not only driving the growth of its cloud computing business internally but is also expected to open up a new market worth nearly one trillion US dollars by being sold to third parties.
Driven by this expectation, Alphabet's stock price surged 31% in the fourth quarter, making it the tenth-best performing component in the S&P 500 Index. The market's optimism about the commercial prospects of TPUs stems from a series of recent key developments. At the end of October, Alphabet announced that it would provide AI startup Anthropic PBC with chips worth tens of billions of dollars, a move that pushed its stock price up by more than 6% within two days.
A month later, according to a report by The Information, Meta Platforms Inc. is negotiating a multibillion-dollar investment in TPUs, which again caused the stock price to jump. Gil Luria, director of technology research at DA Davidson, estimated that if Alphabet can seriously advance the external sales of TPUs, it could capture 20% of the AI chip market within the next few years, turning it into a business worth approximately US$900 billion.
Wall Street generally believes that TPUs represent Alphabet's core advantage in the intense AI competition. Even if Alphabet has never sold a single chip externally, its more efficient proprietary chips mean a superior-performing and cost-effective cloud service. However, once it begins serious external sales of TPUs, its business landscape will undergo a disruptive transformation.
Seeking Alternatives Beyond NVIDIA
Against the backdrop of NVIDIA’s dominance in the current AI chip market, TPUs offer an attractive alternative for companies seeking supply chain diversification.
Gil Luria, director of technology research at DA Davidson, stated:
"If enterprises want to reduce their reliance on NVIDIA, TPUs are an excellent choice, giving us ample reason to remain optimistic."
TPUs belong to the category of 'Application-Specific Integrated Circuits' (ASICs), customized for accelerating machine learning workloads. This characteristic makes them less versatile compared to NVIDIA’s chips but also provides a significant cost advantage. Mark Iong, equity portfolio manager at Homestead Advisers, pointed out that in an environment where investors are becoming increasingly cautious about AI-related expenditures, cost efficiency has become a true competitive edge:
"NVIDIA’s chips are more expensive and harder to obtain, but if you can use ASIC chips, Alphabet is there and far ahead in this market."
The near-trillion-dollar market cap potential
Analysts have begun quantifying the enormous commercial value that external sales of TPUs could bring.
Gil Luria estimated that if Alphabet seriously advances the external sales of TPUs, it could capture 20% of the AI chip market within a few years, turning it into a business worth approximately $900 billion.
Morgan Stanley analyst Brian Nowak also noted an "emerging TPU sales strategy." Citing forecasts from the firm's semiconductor analysts in Asia, he stated that TPU procurement is expected to reach 5 million units by 2027, approximately 67% higher than previous estimates, and 7 million units by 2028, exceeding prior expectations by 120%. In a December 1 report to clients, Nowak wrote that while much of the demand may come from Alphabet's internal use and Google Cloud Platform, this also "reveals Alphabet's potential to sell more TPUs."
According to Morgan Stanley’s estimates, every sale of 500,000 TPUs to third-party data centers could add approximately $13 billion to Alphabet's revenue in 2027 and contribute 40 cents to its earnings per share. Based on analyst projections, Alphabet’s revenue in 2027 is expected to be around $447 billion; an additional $13 billion would represent nearly a 3% increase in sales. According to data compiled by Bloomberg, over the past three months, the market consensus for the company’s 2027 revenue has been revised upward by more than 6%.
Synergies of an AI full-stack strategy
The value of TPUs lies not only in their potential as standalone products but also in their deep integration with Alphabet’s broader AI ecosystem.
Google’s recently released AI model, Gemini, has received high praise from external sources. Optimized to run efficiently on TPUs, it further validates the intrinsic value of these chips. Mark Iong commented, “Alphabet is the only company that holds a leading position in every layer of AI,” pointing out that across areas such as the Gemini model, Google Cloud, and TPUs, “this gives it an incredible advantage.”
Nevertheless, it remains unclear how committed Alphabet is to selling chips on a large scale to third parties, but its internal advantages have already paved the way for future business decisions.
Excessive expectations for the TPU business could also lead to investor disappointment if they fail to materialize in the future, especially against the backdrop of a significant rise in Alphabet's stock price.
Currently, Alphabet’s stock is trading at approximately 27 times expected earnings, the highest level since 2021 and significantly above its ten-year average. However, even so, its valuation remains lower compared to other major technology stocks such as Apple, Microsoft, and Broadcom.
Allen Bond, portfolio manager at Jensen Investment Management, recently took advantage of the stock price increase to reduce his position partially. Nonetheless, he remains optimistic about the company’s overall standing and outlook, stating that “the path for TPUs to become a revenue driver is credible.” He added:
“Alphabet is demonstrating tangible strength and progress in the AI field. While this is increasingly being recognized by investors, its valuation still appears reasonable given growth expectations. A company with strong momentum in AI, yet trading at a lower valuation than Microsoft and Apple, represents a core holding.”
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