Alphabet’s AI Chip Ambitions Gain Momentum with Major Deals

Alphabet Inc. is emerging as a formidable competitor to Nvidia in the critical market for artificial intelligence semiconductors. According to analyst projections, the company's proprietary Tensor Processing Units (TPUs) represent a potential revenue opportunity approaching $900 billion. A series of high-profile contracts and strategic alliances are fueling significant investor interest in this segment.

The company's recent quarterly results highlight a robust operational backdrop. For the third quarter, total revenue climbed 16% to $102.35 billion. Earnings per share significantly outperformed expectations, coming in at $2.87 against a consensus forecast of $2.29. A standout performer was Google Cloud, which saw revenue surge 34% to $15.2 billion. The segment's operating margin expanded to 23.7%, up from 17.1% a year earlier, indicating improving profitability. Furthermore, the cloud division's remaining performance obligation, a key indicator of future revenue, stands at approximately $155 billion.

Multi-Billion Dollar Agreements Signal TPU Traction

The market for Alphabet's custom AI chips is accelerating rapidly. Gil Luria, a technology analyst at DA Davidson, estimates that TPUs could capture roughly 20% of the broader AI market within several years, representing a business valued at around $900 billion. This outlook is supported by concrete commercial developments:

• Anthropic Commitment: Alphabet secured a multi-year agreement with AI firm Anthropic for TPUs valued at several tens of billions of dollars.
• Meta Platforms Evaluation: Reports indicate Meta Platforms is considering deploying Google's TPUs in its data centers beginning in 2027.
• Revised Sales Forecasts: Analysts at Morgan Stanley have raised their unit sales estimates, now projecting 5 million TPU units sold in 2027 (a 67% increase over prior estimates) and 7 million units in 2028 (a 120% jump). Their analysis suggests that every half-million TPU chips sold to external data centers could add approximately $13 billion to 2027 revenue and contribute $0.40 to earnings per share.

Strategic Partnerships and Product Momentum

Beyond chip sales, Alphabet is deepening its ecosystem through key partnerships. On December 4, Google Cloud expanded its multi-year collaboration with AI coding startup Replit. The agreement focuses on advancing "Vibe Coding," an approach to software development using natural language prompts instead of traditional programming. Replit will remain a major customer of Google Cloud infrastructure and will integrate several of Google's AI models, including Gemini 3, 2.5 Flash Lite, 2.5 Flash, and Imagen 4. The startup is targeting $1 billion in revenue by the end of 2026, positioning it as a significant enterprise client for Google Cloud.

Should investors sell immediately? Or is it worth buying Alphabet?

The launch of Alphabet's latest AI model, Gemini 3, has also made waves, reportedly prompting a "Code Red" response at OpenAI to enhance ChatGPT. Since July, Gemini's monthly user base has grown 44% to 650 million, while ChatGPT reports 800 million weekly users.

Analyst Sentiment and Shareholder Update

The positive developments have prompted several financial institutions to revise their price targets upward:
* HSBC increased its target to $370 from $335 on December 3, reiterating a Buy rating.
* Deutsche Bank raised its target to $340.
* BNP Paribas Exane set a target of $355.
* Scotiabank lifted its target to $336.
* Morningstar adjusted its fair value estimate upward to $340.

For shareholders, the ex-dividend date for the quarterly cash dividend of $0.21 per share is December 8, with payment scheduled for December 15.