Alphabet investors bet on TPU chips to become standalone hit business

People who own shares in Alphabet Inc. are becoming more hopeful that the company’s computer chips might become a major source of income in the years ahead.

Gil Luria, who leads technology research at DA Davidson, said companies looking for alternatives to Nvidia products could turn to TPUs. He estimated that if Alphabet decides to seriously pursue chip sales, the TPUs might grab 20% of the artificial intelligence market within a few years. That would make it a business worth roughly $900 billion.

“The chip business could ultimately be worth more than Google Cloud,” Luria explained to Bloomberg. “But even if it never sells a chip externally, the better chip means a better, more efficient cloud.”

Major deals spark investor excitement

Two major announcements have gotten investors excited. In late October, Alphabet said it would provide tens of billions of dollars worth of chips to Anthropic PBC. The news sent the stock climbing more than 6% over two days. Then, in November, the Information reported that Meta Platforms Inc. was discussing spending billions to get access to TPUs, which caused another jump in the stock price.

TPUs belong to a category called application-specific integrated circuit chips, or ASICs. These chips are built specifically for one job, in this case, speeding up machine learning tasks. They cannot do as many different things as Nvidia chips, but they cost less money. This matters a lot right now because investors are asking questions about how much is being spent on AI technology.

Mark Iong, who manages equity investments at Homestead Advisers, pointed out that Nvidia chips carry higher costs and can be difficult to obtain. He said Alphabet leads the ASIC market by a wide margin and called the chip capability part of the company’s special advantage. “It won’t control the entire market, but this is part of the secret sauce for the stock,” Iong said.

The company’s newest Gemini AI model, which launched recently to positive feedback and works best with TPUs, provided further proof of the chips’ value. Iong noted that Alphabet stands alone as the only company with leading positions across every level of AI, including Gemini, Google Cloud, TPUs and other areas.

Valuation concerns despite growth potential

The stock currently trades at around 27 times projected earnings, the highest level since 2021 and well above the 10-year average. Still, Alphabet remains less expensive than rivals like Apple Inc., Microsoft Inc. and Broadcom Inc.

Allen Bond, who manages portfolios at Jensen Investment Management, recently sold some of his Alphabet holdings as the stock climbed. But he still feels good about the company’s situation and sees “a credible path to the TPUs becoming a driver of revenue.”

Bond said Alphabet is showing real strength with AI developments, and while investors increasingly recognize this, the price still looks fair considering growth expectations. “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,” he said.

Google has spent over ten years developing its TPU technology, which was originally used only for internal operations before becoming available to cloud customers in 2018. The latest Ironwood TPU chip represents the seventh generation of this technology and is reportedly four times faster than its predecessor.

As previously reported by Cryptopolitan, MediaTek shares have also climbed as the company supplies components for Google’s TPU ecosystem, with analysts upgrading their projections for the contribution of TPUs to MediaTek’s business through 2028.

Don’t just read crypto news. Understand it. Subscribe to our newsletter. It's free.