Google's AI chips could be its $900 billion 'secret ingredient' - Bloomberg

Investors in Google's holding company, Alphabet, are increasingly confident that the company's AI chips could become one of the key drivers of revenue growth in the future, Bloomberg writes. According to DA Davidson, the company can take up to 20% of the AI-chip market in a few years, which means a business volume of about $900 billion. Investors are waiting for Google to start selling its chips to third-party customers.

The success of Alphabet's proprietary tensor processing units (TPUs) was one of the reasons for Alphabet's stock rally in the fourth quarter: the securities added 30%, becoming one of the leaders of the S&P 500 index, Bloomberg writes. TPU chips have long been considered an internal advantage for Google, accelerating the development of its cloud business. Now there are growing expectations that Alphabet will start selling these chips to third-party customers, and this will become a new source of revenue for the company, the agency said.

"If companies want to reduce their reliance on Nvidia, TPUs [from Google] are a good alternative, and that's encouraging," Gil Luria, head of technology research at DA Davidson, told Bloomberg. - Alphabet's chips could end up being even more valuable than [cloud service] Google Cloud. But even if they are never sold to external customers, they still make the company's own cloud faster and more efficient."

If Alphabet gets serious about selling TPUs, DA Davidson estimates that the company could take up to 20% of the AI chip market in a few years, which would mean a business of about $900 billion, Luria said.

In October, Alphabet announced that it would supply TPU chips to AI startup Anthropic for tens of billions of dollars, after which the stock jumped 6% in two days. In November, The Information reported that Meta Platforms, which owns social networks Facebook and Instagram, was also discussing buying TPU. That also sent Alphabet's stock up - and Nvidia's stock down.

Google's tensor processors are ASIC chips (application-specific integrated circuits), i.e. processors designed for a specific task - in this case, data processing for AI. Such chips are called custom chips. They are produced by contract manufacturer Broadcom. They are less versatile than Nvidia's chips, but they are also significantly cheaper, which is an important advantage against the backdrop of investors' growing questions about the justification of high AI costs, Bloomberg notes.

"Nvidia chips are more expensive and hard to get, but if you can get by with ASICs, Alphabet is the market leader," Homestead Advisers portfolio manager Mark Yong told the agency. - It won't take the whole market, but therein [chips] lies part of Alphabet's secret ingredient."

The value of TPUs was also confirmed amid the release of the new AI model Gemini 3.0, which received high marks and is optimized for these chips, Bloomberg writes. "Alphabet is the only company that is leading at all levels of AI," Yong added. - It has Gemini, TPU, Google Cloud - all of which give the company an incredible advantage."

But, Yong said, it remains to be seen how aggressively Alphabet will sell the chips to third-party customers.

Morgan Stanley analyst Brian Novak saw signs of an "emerging TPU sales strategy," Bloomberg writes. In a December note to clients, Novak quoted the bank's analyst in Asia as expecting about 5 million TPUs to be sold in 2027 (67% more than previously estimated) and as many as 7 million (+120%) in 2028. While most of the demand will come from Alphabet itself and its cloud, the numbers, according to Novak, point to the potential for direct sales as well.

Morgan Stanley estimates that every 500,000 TPUs sold to third-party data centers will add $13 billion in revenue to Alphabet in 2027 and $0.4 to EPS. With Alphabet's expected revenue of $447 billion, that would add nearly 3%. Over the past three months, the company's consensus revenue forecast for 2027 is up more than 6%, according to data compiled by Bloomberg.

"Alphabet is showing real progress in AI. And while investors are starting to realize that, the valuation [of the stock] still looks reasonable given the growth rate," Jensen Investment Management portfolio manager Allen Bond told Bloomberg. "We're seeing more signs of acceleration in AI at a company that trades at a discount to Microsoft and Apple. Therefore, Alphabet stock remains the core of our portfolio."

This article was AI-translated and verified by a human editor