Alphabet’s Misunderstood TPUs Are a Hidden Catalyst Investors Haven’t Yet Noticed Alex Sirois Thu, November 12, 2026 at 10:45 AM EST 5 min read GOOGM +0.87% MSFT +1.35% AMZN +1.08% NVDA -4.63% Explore stocks on Coinbase Trading disclosure Trading disclosure The above button links to Coinbase. Yahoo Finance is not a broker-dealer or investment adviser and does not offer securities or cryptocurrencies for sale or facilitate trading. Coinbase pays us for certain activity generated through this link. Prices displayed are informational.
Alphabet (GOOGL) now sells its in-house TPU systems to outside customers, diverting spending from merchant chipmakers and keeping chip, cloud and model margins under one roof.
Google Cloud growth accelerated from 48% to 103% in four quarters, while Microsoft's Azure grew 48% and Amazon's AWS grew 39%.
Alphabet trades at 13 times earnings, but $51 billion in quarterly capex pushed free cash flow negative and fueled share dilution.
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My Alphabet (NASDAQ:GOOGL) 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 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".
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."
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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.
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).
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.
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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