Alphabet's TPU Strategy Reinforces AI Moat but Valuation Concerns Persist

What happened

A recent article highlights Alphabet's vertically integrated TPU strategy as a long-term threat to Nvidia's AI hardware dominance, suggesting it could cap Nvidia's share in AI economics. This aligns with Alphabet's heavy AI infrastructure investments, documented in filings showing rising capex for data centers and AI models. Alphabet's core Google Services and Cloud businesses generate robust cash flow, funding these initiatives while maintaining profitability. However, the DeepValue report indicates that at ~30x earnings, much of the AI upside is already embedded in the stock price, with risks from regulatory pressures and increasing capital intensity. Thus, while the TPU development enhances Alphabet's competitive edge, it does not mitigate the valuation concerns that support a cautious investment stance.

Implication

Alphabet's internal TPU development could reduce reliance on external AI hardware vendors, potentially lowering costs and boosting efficiency for its cloud and AI services, strengthening its position against competitors. This vertical integration supports Google Cloud's growth and AI monetization efforts, as noted in the report's focus on Cloud trajectory. However, the required capital expenditures are substantial, with guidance for significantly higher capex in 2026, increasing fixed costs and investment risk. Given the stock's ~57% appreciation over the past year, these advantages appear largely priced in, offering limited margin for error if growth or margins disappoint. Therefore, while strategically sound, this does not justify immediate investment without a more attractive valuation or clearer evidence of AI-driven revenue uplift.

Thesis delta

The new information underscores Alphabet's strategic commitment to AI through vertical integration, which could enhance long-term moat durability and profitability. However, it does not shift the core thesis; Alphabet remains a high-quality business with elevated valuation and execution risks, reinforcing the 'WAIT' recommendation until price aligns better with intrinsic value or growth materializes more convincingly.