Google's TPU business seen as $900B opportunity amid growing AI demand

D.A. Davidson estimates Google's Tensor Processing Unit (TPU) business and DeepMind unit could be worth $900 billion if spun off, positioning Alphabet as a formidable domestic rival to Nvidia in the AI accelerator market. This significant valuation increase, from an earlier $717 billion, is driven by rising demand for cost-efficient TPUs, which are seeing increased adoption from frontier AI labs, including interest from Anthropic and xAI. While D.A. Davidson raised Alphabet's price target to $190, it maintained a neutral rating, noting that a near-term spinoff is unlikely and the unit's value remains significantly underappreciated within the broader company structure.

Analysis

D.A. Davidson's analysis presents a compelling case for a significantly undervalued asset within Alphabet Inc. (GOOGL), estimating its Tensor Processing Unit (TPU) and DeepMind division could be worth $900 billion if spun off, a notable increase from a $717 billion valuation earlier this year. This positions Google as a formidable, albeit under-the-radar, domestic rival to Nvidia in the AI accelerator market. The valuation is underpinned by tangible momentum, including high demand for the sixth-generation Trillium TPUs and a nearly 96% growth in developer activity on Google Cloud between February and August. The appeal of TPUs stems from their cost-efficiency and high performance, with the ability to scale up to 42.5 exaflops. Critically, adoption is expanding beyond Google's internal use, with notable interest from external AI firms such as Anthropic and xAI, signaling growing confidence in the JAX-TPU ecosystem. A potential manufacturing shift from an exclusive partnership with Broadcom (AVGO) to including MediaTek for the upcoming Ironwood generation could further drive cost efficiencies. Despite this positive outlook and a price target increase to $190, D.A. Davidson maintains a Neutral rating, citing the low probability of a near-term spinoff to unlock this value, leaving the segment's full potential obscured within Alphabet's broader corporate structure.

Key Decisions for Investors

• Investors should recognize the significant, yet 'well-undervalued,' $900 billion potential of Alphabet's TPU and DeepMind division as a long-term growth catalyst that provides a powerful competitive position in the AI hardware market.
• Given that a spin-off is unlikely in the near term, focus on organic growth indicators such as external TPU adoption by firms like Anthropic and xAI, and continued growth in developer activity, as these will be the primary drivers for surfacing the unit's value.
• While Nvidia remains dominant, view Alphabet's TPU progress as a credible emerging threat, particularly in the market for cost-efficient, large-scale inference, which may warrant diversifying exposure across the AI accelerator landscape.
• Monitor developments regarding the potential supply chain shift to MediaTek for the next-generation Ironwood TPU, as this could enhance cost-competitiveness and impact the profitability profile of Google's AI hardware ambitions.