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Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) just gave its custom artificial intelligence (AI) chips another way to reach customers. On Monday, Nov. 9, Google Cloud announced two new versions of its tensor processing units (TPUs) -- chips Google designs to train and run AI models. And Google Cloud vice president Mark Lohmeyer told reporters that select customers will be able to install one of them, the TPU 8tx, in their own data centers.
For most of their history, the only way to use a TPU was to rent one in Google's cloud. This changed in the second quarter, when Alphabet started booking revenue on TPU systems it sold to customers running their own data centers. Google now says almost 100 customers use the chips.
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Meanwhile, Alphabet shares trade near $292 as I write. Its record close was on May 13, at $402.62, which puts the stock about 28% under that peak.
Most of the revenue from those chip sales won't arrive until 2027, and Alphabet pays for the hardware first. But I think the move makes the long-term case for the stock a bit stronger.
The TPU 8tx is made for confidential work. Google says it's designed for regulated firms and governments running AI alongside their most sensitive data, and it protects that data even as the chip is processing it. (Usually, data needs to be unlocked in memory as a computer works on it.)
Google Cloud CEO Thomas Kurian described the appeal on Alphabet's third-quarter earnings call in late October.
"For some industries, they have data in their premise that they cannot move to a cloud, and it allows us to bring accelerated compute to where the data sits," Kurian said.
Put another way, on-site TPUs can reach customers Google's cloud can't fully serve. Some TPU customers Kurian named on the call seem to match that description, such as capital markets firms Citadel Securities and Jump Trading.
The market these chips compete in is huge. Nvidia posted data center revenue of $89.0 billion in its fiscal second quarter alone (the period ended July 26, 2026). Even a small slice of that kind of spending could matter to Alphabet.
Showing how quickly Google's own AI business is moving, Google Cloud's third-quarter revenue more than doubled year over year to $30.7 billion, and management said TPU system sales were a meaningful contributor. The growth rate has climbed every quarter this year -- 63% in the first quarter, then 82% in the second. Cloud's backlog (contracted revenue not yet recognized, including the TPU sales deals) hit $561 billion, up from $462 billion at the end of March. And the segment's operating margin widened to 36.2% from 23.7% a year before.
Still, the chip sales themselves are early. Alphabet's quarterly filings say it's signed a limited number of agreements to supply TPU systems to customers who run their own infrastructure. The company expects the significant majority of the revenue from these deals to be recognized in 2027.
Of course, selling hardware also changes how cash flows through Alphabet. It buys parts after a contract is signed but before the customer pays, so the money goes out first.
Alphabet's inventory, which consists mainly of TPU systems and Pixel devices, jumped to $13.3 billion at the end of September from $2.4 billion at the end of 2025. With that build and $51.4 billion in capital spending, free cash flow was negative $9.1 billion in the third quarter.
On the upside, Kurian said putting TPU systems in customer data centers "offsets the need for us to have to prebuild facilities to host these TPU systems." But Alphabet still expects capital spending of $195 billion to $205 billion this year, and it expects that number to grow significantly in 2027.
Does this change the case for Alphabet stock? Not overnight. But it gives Google a second way to make money on chips it already designs for itself, from business its cloud couldn't reach alone.
Alphabet stock costs around 19 times expected 2027 earnings. That's a fair price, I think, for a company whose cloud revenue just more than doubled. Free cash flow will probably stay weak for a few more quarters. Still, at this price, I'd consider buying shares.
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Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.
Should You Buy Alphabet Stock Now That Google Will Let Customers Run Its AI Chips in Their Own Data Centers? was originally published by The Motley Fool
