Investors are betting big on Alphabet Inc.’s semiconductor ambitions, with the company’s tensor processing units (TPUs) emerging as a major source of sales.
While Alphabet’s TPU chips have long powered its cloud computing operations, market enthusiasm – company shares are up 31% in the fourth quarter – is building around the possibility of the tech giant selling these specialized processors to external customers. Such a move could unlock a new revenue stream potentially worth nearly $1 trillion.
“If companies want to diversify away from NVIDIA Corp., TPUs are a good way to do it,” said Gil Luria, head of technology research at DA Davidson. He estimates that if Alphabet aggressively pursues external chip sales, the company could capture 20% of the artificial intelligence (AI) chip market within a few years, or about $900 billion.
Consider: In October, Alphabet announced a multibillion-dollar chip supply agreement with Anthropic. A month later, reports emerged that Meta Platforms Inc. was negotiating billions in TPU access.
TPUs are application-specific integrated circuits designed exclusively for machine learning workloads. While less versatile than NVIDIA’s general-purpose chips, they offer significant cost advantages. Mark Iong, equity portfolio manager at Homestead Advisers, said Alphabet leads the ASIC market by a wide margin, calling it part of the company’s “secret sauce.”
The chips’ value was further validated by the launch of Alphabet’s Gemini AI model, which earned rave reviews and is optimized for TPU performance.
Morgan Stanley analyst Brian Nowak identifies emerging signs of a “budding TPU sales strategy.” The firm’s Asia semiconductor analyst projects five million TPU purchases in 2027 and seven million in 2028 — 67% and 120% above previous estimates, respectively. Every 500,000 TPUs sold to third-party data centers could add approximately $13 billion to Alphabet’s 2027 revenue and 40 cents to earnings per share.
However, risks remain. While still cheaper than Apple Inc., Microsoft Corp., and Broadcom Inc., elevated expectations could set the stage for disappointment if the TPU business fails to materialize as hoped.
Despite taking some profits during the rally, portfolio manager Allen Bond of Jensen Investment Management remains bullish on Alphabet’s prospects, citing “a credible path to the TPUs becoming a driver of revenue.” With concrete evidence of AI momentum and a valuation discount compared to Microsoft and Apple, Alphabet continues to warrant investor attention as its semiconductor strategy unfolds.
