Alphabet Has an Nvidia-Like Business. It Could Be Worth Hundreds of Billions.

Alphabet Inc. (GOOGL), the parent company of Google, has a business that is increasingly being compared to Nvidia Corp. (NVDA), the leading manufacturer of graphics processing units (GPUs) used in artificial intelligence (AI) and other high-performance computing tasks. While Alphabet's Tensor Processing Units (TPUs) are not as widely adopted as Nvidia's GPUs, they are gaining traction and could be worth hundreds of billions if the company pursues the market opportunity more aggressively.

Alphabet's TPUs are specialized AI accelerators that can handle machine-learning tasks more efficiently than traditional CPUs. They are used by companies like Apple Inc. (AAPL) to train models, demonstrating their potential for high performance and profitability. However, Alphabet has historically made it difficult for external developers to access and effectively utilize TPUs, creating a bottleneck that has limited their commercial viability. This is in contrast to Nvidia's robust ecosystem for developers, which makes it easier for external developers to access and utilize Nvidia's GPUs.

D.A. Davidson analyst Gil Luria estimates that a combination of Alphabet's TPU business and its Google DeepMind artificial-intelligence business could be worth $700 billion on a sum-of-the-parts basis. This valuation is significantly higher than the market capitalization of other AI-focused companies like Nvidia or AMD. However, Luria has a neutral rating on Alphabet's stock, suggesting that he believes the company is not doing enough to pursue the massive market opportunity in AI hardware.

Alphabet's TPU business, combined with its AI capabilities, has the potential to be a more valuable and competitive offering in the long run. However, the company must address the accessibility and ease-of-use challenges to fully realize this potential. One way to do this is by creating a more robust ecosystem for developers, similar to Nvidia's. Additionally, Alphabet could consider a breakup to better realize the value of its ecosystems, including its TPU business.

In conclusion, Alphabet has an Nvidia-like business with significant growth potential and a market opportunity worth hundreds of billions. However, the company must address the accessibility and ease-of-use challenges and consider strategic moves like a potential breakup to fully realize the value of its TPU business. By doing so, Alphabet could become a major player in the AI hardware market and create significant value for shareholders.