Alphabet’s AI chips are a potential $900 billion ‘secret sauce’

Core Viewpoint - Investors are increasingly optimistic about Alphabet Inc.'s semiconductor business, particularly its tensor processing unit (TPU) chips, which could significantly contribute to future revenue growth for the company [1][2]. Group 1: TPU Business Potential - The success of TPUs has driven a 30% rally in Alphabet's stock during the fourth quarter, making it one of the best performers in the S&P 500 Index [2]. - There is optimism that Alphabet could begin selling TPUs to third parties, potentially creating a new revenue stream that could be valued at nearly $1 trillion [2][3]. - If Alphabet captures 20% of the artificial intelligence market through TPU sales, it could represent a business worth approximately $900 billion [3]. Group 2: Competitive Landscape - TPUs are application-specific integrated circuit (ASIC) chips designed to accelerate machine learning workloads, making them cheaper than Nvidia's semiconductors, which is advantageous amid rising concerns about AI-related spending [5]. - Alphabet's leadership in AI across various layers, including TPUs and Google Cloud, provides a competitive edge [6][7]. Group 3: Sales Projections and Revenue Impact - Morgan Stanley's estimates suggest that around five million TPUs could be sold in 2027, a 67% increase from previous estimates, with projections of seven million in 2028, representing a 120% increase [8]. - Selling 500,000 TPU chips to third-party data centers could add approximately $13 billion to Alphabet's 2027 revenue, boosting total sales by nearly 3% [9]. Group 4: Market Valuation and Investor Sentiment - Alphabet's shares are currently trading at around 27 times estimated earnings, near their highest since 2021, yet still cheaper than competitors like Apple and Microsoft [10][11]. - Despite some investors taking profits, there remains a positive outlook on Alphabet's potential for TPUs to become a significant revenue driver, supported by tangible progress in AI [11].