Alphabet Begins Direct TPU Sales, Boosting Broadcom's AI Revenue

Alphabet Inc. transitioned its custom tensor processing units (TPUs) from a rental-only model to direct hardware sales in the second quarter. The company delivered TPU systems to customer data centers for the first time, initiating revenue recognition for these specialized AI workloads. This strategic shift expands Alphabet’s addressable market beyond its cloud infrastructure, allowing enterprises to deploy Google’s silicon in their own facilities.

While current sales volumes remain limited, the move signals a broader commercial application for Google’s AI chips. Broadcom Inc., the primary developer and supplier of these TPUs, stands to benefit regardless of the customer destination. The supplier secures payment through long-term agreements for chip development and networking components, ensuring revenue capture whether the hardware resides in Google’s data centers or third-party sites.

Broadcom AI Revenue Accelerates

Broadcom’s financial results reflect the accelerating demand for AI infrastructure. AI semiconductor revenue reached $16.7 billion in the fiscal third quarter, a 221% year-over-year increase and a 54% jump from the prior quarter. Management guided for approximately $21.7 billion in AI semiconductor revenue for the fiscal fourth quarter, implying 236% growth. Total company revenue rose 86% year-over-year to $29.6 billion, while free cash flow nearly doubled to $13.7 billion.

CEO Hock Tan indicated that AI company Anthropic plans to deploy five gigawatts of next-generation TPU computing capacity in 2027, following one gigawatt this year. This expansion underscores the sustained demand for Broadcom’s custom silicon. Despite a 31% decline from its 52-week high, the stock trades at approximately 18 times expected next-fiscal-year earnings, reflecting investor recalibration of valuation multiples amid high growth rates.

Alphabet Cloud Profitability Surges

Alphabet’s second-quarter results show significant margin expansion in its cloud segment. Google Cloud revenue grew 82% year-over-year to $24.8 billion. Operating income in the segment climbed to $8.8 billion from $2.8 billion a year earlier, pushing the operating margin from roughly 21% to 36%. The company’s backlog, which includes new TPU sales agreements, increased by more than $50 billion sequentially to $514 billion.

Alphabet benefits from a dual revenue model, earning from both direct hardware sales and cloud rentals. The direct sales include hardware, software, installation, and support, while the cloud model captures recurring service fees. This structure allows Alphabet to retain customer relationships even when selling standalone systems. According to GN auto stocks/technology: tech stocks analysis, this diversification mitigates reliance on a single consumption model.

Future Revenue Concentration Risks

Alphabet disclosed that the significant majority of revenue from initial TPU sales agreements will be recognized in 2027. This timing aligns with broader AI infrastructure rollout cycles. Broadcom faces customer concentration risks, with its top five end customers accounting for about 55% of revenue in the fiscal third quarter. Any shift in strategy by major clients could impact supplier earnings, though current backlog levels suggest strong near-term visibility.