Key points
- OpenAI plans to buy Google's TPU chips
- Wall Street's wide range on Google's TPU sales
- TD Cowen estimates thinner margins on Google's outside TPUs
Alphabet (GOOGL) reports third-quarter results on Wednesday as Google pushes its custom AI chips beyond its own data centers. OpenAI is planning to buy Google's tensor processing units, or TPUs, CNBC confirmed after The Information first reported the plan on Tuesday.
The OpenAI report came the same day Alphabet said Oracle (ORCL) will offer TPUs on its cloud starting in 2027. The companies called Oracle the first hyperscaler outside Google to offer TPUs but didn't disclose financial terms. Google had already begun offering TPUs in outside data centers in the second quarter. Alphabet shares closed at $320.58 on Tuesday, up 1.2%.
Analysts' TPU sales estimates are far apart
TD Cowen models $9.4 billion in TPU sales for the second half of 2026 and $62.5 billion for 2027. Wells Fargo expects about $9 billion in third-quarter TPU sales and $99 billion next year. The estimates, as reported, don't say whether they count only TPUs sold for outside data centers or also TPU capacity rented through Google Cloud.
Alphabet's chief financial officer, Anat Ashkenazi, said on the July earnings call that only a small part of TPU revenue from existing agreements will be recognized this year. She said the "vast majority" will come in 2027.
"They're a very strong competitor, and it's very possible that they could eventually take market share from Nvidia," said Chris Ballard, managing director of Check Capital Management. His firm owned about $236 million in Alphabet stock as of June 30. Nvidia (NVDA) has dominated the market for AI chips.
TD Cowen estimates a 20% operating margin on outside TPU sales. By comparison, Google Cloud's overall operating margin was about 35% last quarter.
At a Goldman Sachs conference in September, Google Cloud CEO Thomas Kurian said Google's AI servers pay for themselves in under two years, and servers running Google's own chips do it in roughly half that time. "It's because we can optimize that whole stack," Kurian said.
Research firm SemiAnalysis estimates that Google's latest TPU, Ironwood, costs about 44% less to own and operate than an Nvidia GB200 server.
Google Cloud still trails AWS and Azure
Google Cloud brought in $25 billion in revenue in the second quarter, up 82% from a year earlier. Amazon Web Services had $42 billion and Microsoft Azure had $29 billion. Analysts expect Google Cloud revenue to grow about 90% from a year earlier in the third quarter.
Alphabet's 2026 capital spending forecast stands at $195 billion to $205 billion. In the April-to-June quarter, the company spent more than its operations generated.
Google's biggest TPU customer is Anthropic, whose Claude models compete with Google's Gemini. Anthropic agreed last October to use up to 1 million TPUs in a deal worth tens of billions of dollars. Mizuho says the agreement brings nearly a gigawatt of capacity online this year and describes it as Google "arming its closest model competitor."
Anthropic is also financing part of its TPU supply through a $63 billion package announced on October 26. A company formed for the deal will buy chips and networking gear from Broadcom (AVGO), which works with Google on TPUs, and lease them to Anthropic.
Google is also an Anthropic shareholder. Anthropic's IPO filing says Google will hold more than 5% of its outstanding capital stock once Anthropic's preferred stock and convertible notes convert at the IPO. Google's shares will carry no votes.
In the $63 billion financing, Broadcom is providing what the deal's announcement calls "residual value support" equal to the senior debt. Separately, Anthropic's filing says the company has guaranteed the obligations of certain subsidiaries that are party to AI infrastructure arrangements.
