Alphabet’s Misunderstood TPUs Are a Hidden Catalyst Investors Haven’t Yet Noticed
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My Alphabet (NASDAQ:GOOGL | GOOGL Price Prediction) position has grown after every earnings report this year, and the October sell-off made me buy faster. Shares sit at $293.45, down 16.8% over the past month. I think the market is missing Alphabet’s chip business.
Alphabet Sells the Chips Everyone Else Has to Buy
Alphabet designs its own AI chips, called Tensor Processing Units (TPUs), and it now sells TPU systems to outside customers. Those sales count as Google Cloud product revenue, and they were a meaningful contributor to revenue growth last quarter. When a customer buys a TPU system from Google, that spending can go around merchant chipmakers. In its own filing, NVIDIA (NASDAQ:NVDA) lists Alphabet among companies developing internal accelerated-computing solutions. Google keeps the chip margin, the cloud margin and the model margin under one roof. Management calls this its “full-stack approach”.
Three Reasons the Data Keeps Me Buying
First, growth keeps speeding up. Google Cloud revenue grew 48% in Q4 2025, 63% in Q1 2026, 82% in Q2 and 103% in Q3, when it reached $30.709 billion. CEO Sundar Pichai said: “We’re also seeing strong demand for our TPU systems across a wide range of customers.”
Second, that growth comes with real profit. Cloud operating income reached $11.121 billion, up from $3.594 billion a year earlier. Across the whole company, Alphabet makes a 32.03% operating margin and a 29.6% return on invested capital.
Third, the price is modest. The trailing P/E is 13. Unrealized gains on equity investments make that multiple look lower than it is, so I focus on operating income, which rose 29.93% last quarter. The debt-to-equity ratio stands at 0.143, interest coverage is 175.3x, and Alphabet raised the quarterly dividend 5% to $0.22.
Why My Money Skips the Obvious Alternatives
The cloud business at Microsoft (NASDAQ:MSFT) is excellent. Still, Azure grew 48% last quarter, while Google Cloud grew 103%, and Microsoft trades at a P/E of 29. Another company designing custom chips is Amazon (NASDAQ:AMZN), which calls them Trainium. AWS grew 39%, and Amazon has a P/E of 37. NVIDIA leads in AI chips today, with Data Center revenue of $89.023 billion last quarter. At a P/E of 35, though, I prefer owning the challenger at 13 (we reverse-engineered what the biggest AI chip winners looked like early in a free playbook here: The Next Nvidia Playbook).
One Costly Risk Keeps Me Disciplined
The spending is heavy, and it stresses cash flow. Capital spending hit $51.355 billion in Q3, which drove free cash flow to negative $9.065 billion. Alphabet raised $28.7 billion from senior notes and also sold new shares through an at-the-market program. That program has $27.6 billion left, so my interest keeps getting diluted. Earnings per share of $2.12 missed expectations of $2.9659. A loss on equity investments cut EPS by $0.55.
My thesis still holds because the spending is going toward demand customers have already signed up for. The Cloud backlog nearly doubled in Q1 to over $460 billion, and operating cash flow still reached $42.29 billion last quarter.
AI Usage Metrics That Could Fuel the Next Leg
Alphabet’s own AI models now handle nearly 32 billion tokens per minute through its developer tools, 4x a year ago. The Gemini app has reached 1 billion users. Every outside TPU sale gives Google more revenue and takes compute spending away from rivals. Keep an eye on this. Investors should watch whether the market starts to value Alphabet as the chip company it has become.
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Alex Sirois is a financial writer with experience spanning both retail and institutional investing. He has written for InvestorPlace and held roles at BNY Mellon and Bernstein, giving him a perspective that bridges Main Street portfolios and Wall Street analysis.
Alex holds an MBA from George Washington University and has built his career across multiple industries, including e-commerce, education, and translation — a breadth of experience that informs how he breaks down complex financial topics for everyday investors. His writing is conversational, actionable, and grounded in long-term, buy-and-hold investing principles.
At 247 Wall St., Alex focuses on delivering analysis that is both accessible and useful, with a clear emphasis on helping readers make more informed decisions with their money.
