Key Points
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Alphabet is an important GPU customer for Nvidia and co-designs TPU processors with Broadcom.
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Alphabet’s Google Cloud revenue more than doubled in the third quarter, and its TPU sales could reach an estimated $99 billion next year.
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After a recent sell-off, the company’s shares look like a bargain right now.
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Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO) are two leading semiconductor companies that are benefiting immensely from the artificial intelligence infrastructure boom. Both companies have seen their sales and earnings skyrocket over the past several years, and their prices have followed suit, with Nvidia up 303% and Broadcom gaining 230% over the past three years.
And part of their success has come from selling processors to Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) as the company expands its AI cloud computing footprint.
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Here’s how these three companies are intertwined, and why Alphabet’s stock could soar amid rising cloud computing revenue and the development of its own processors.
How Broadcom, Nvidia, and Alphabet are intertwined
Alphabet is spending a lot of money — between $195 billion and $205 billion this year — to expand its AI infrastructure footprint. And some of that money flows directly to Nvidia and Broadcom.
Alphabet is an important Nvidia customer, buying up some of the company’s GPUs for its data centers and then using those processors to rent out AI compute capacity through its Google Cloud services.
Nvidia doesn’t disclose its largest customers, but Alphabet is likely a top customer, and its GPU purchases are estimated to account for double-digit percentages of Nvidia’s sales.
Alphabet’s deals with Broadcom are more direct. Alphabet co-designs its own AI Tensor Processing Units with Broadcom for use in some of its data centers and to sell to customers. The two companies recently extended their TPU partnership through 2031, and are in the middle of a major deal worth about $21 billion to sell their co-designed TPUs to Anthropic.
While developing TPUs with Broadcom puts Alphabet somewhat in competition with Nvidia, the current scale of processor usage is far below Nvidia’s dominant position and could take years to have any significant impact on Nvidia, if at all.
Why Alphabet stock could soar
Alphabet recently reported its third-quarter 2026 results (which ended Sept. 30), and investors were not happy. Its share price fell immediately after the results were published and wiped out $500 billion of the company’s value.
Alphabet shareholders are worried that the company’s immense spending on AI won’t pay off in the long run, and have latched onto the fact that free cash flow was $9.1 billion negative in the quarter. They were rightly concerned about that, but it’s worth mentioning that $5.2 billion of that negative free cash flow came from a one-time European Commission fine.
Importantly, investors overlooked one of Alphabet’s most important growth stories: Google Cloud’s soaring revenue. Google Cloud sales more than doubled in the third quarter to $33.7 billion. That’s a good indicator that Alphabet’s AI spending is being put to good use. This segment is also highly profitable, generating $11.1 billion in operating profit with operating margins of 36%.
What’s more, Google Cloud has a massive $561 billion backlog, half of which Alphabet’s management said will be realized as revenue over the next two years.
All of this is important in the context of Alphabet’s growth story because AI cloud services are rapidly becoming must-have products among all tech companies and many businesses. Goldman Sachs estimates that global AI cloud revenue will reach $2 trillion by 2030, and Alphabet is already a top-three player, with 13% market share (trailing Amazon and Microsoft).
It’s not just cloud computing revenue that will accelerate over the coming years. Alphabet just began selling its co-designed TPUs with Broadcom to other companies in the second quarter, and they could be a significant revenue generator very soon. Analysts at Wells Fargo believe Alphabet’s TPU sales could reach as high as $99 billion next year.
And if all that wasn’t enough to convince you that Alphabet stock could be worth buying right now, consider that its share price looks like a downright bargain. Alphabet stock has a trailing price-to-earnings ratio of just 14.5, which is far below the current tech sector average P/E ratio of 34.
While some investors are worried about AI slowing down amid a new crop of politicians soon taking office, I believe the sell-off has more to do with fear. AI compute needs are rising, and it’s likely that companies and politicians will find some middle ground to find a solution.
Considering all the above, Alphabet stock still looks like a very good deal right now.
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Wells Fargo is an advertising partner of Motley Fool Money. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Broadcom, Goldman Sachs Group, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
