There's no denying that Alphabet's (GOOG +1.22%)(GOOGL +1.37%) cloud computing results were the centerpiece of the company's recently posted second-quarter report. This business unit's revenue improved by a whopping 82% year over year, more than tripling its operating income as a result.
As encouraging as that is, however, perhaps it's not the most exciting leap Google's parent company made during the three months ending in June. Far more important was the fact that -- for the first time ever -- the company's so-called Tensor Processing Units (TPUs) were also directly monetized, officially putting Alphabet in the chipmaking business.
Alphabet is in the right place at the right time
Nvidia remains the leading designer of artificial intelligence processors. But several technology giants with the capabilities of designing their own, often in partnership with players like Broadcom -- are doing so. Alphabet's one of them. Its Tensor Processing Units were initially used strictly in-house, with capacity leased to clients via Google Cloud. But now, some are being shipped to data centers operated by third parties.
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We don't know how much revenue these chips actually produced last quarter, although it likely wasn't a great deal. All we know is that these sales were reflected within the company's Q2 cloud computing revenue of $24.8 billion, which, as was noted, grew 82% year over year.
Nevertheless, look for an increasingly bigger impact from TPUs going forward.
See, the AI industry has only scratched the surface of establishing the infrastructure it thinks it will eventually need. Technology industry research outfit Technavio expects the worldwide artificial intelligence chip business's annual revenue to grow at an average annual pace of more than 24% between now and 2030, when it will be $155 billion bigger than it is now. That growth outlook jibes with Global Market Insights' projection, which is calling for $1.1 trillion worth of annual artificial intelligence chip sales by 2035.
Already a well-proven cloud technology name, Alphabet is positioned to capture at least its fair share of this growth.
Bolstering the bullish case
It's not a reason in and of itself to own Alphabet stock. The lion's share of the company's sales and operating income still comes from its market-leading search engine, and for the time being, most of its cloud computing revenue reflects rented access to its service and apps rather than revenue stemming from sales of Tensor Processing Units. And with Google Cloud's backlog of future business growing by $50 billion to $514 billion as of the end of Q2 (and Q2's total revenue of $119.8 billion, for perspective), that's not apt to change in the immediate future. That's even more so the case given that the company's current supply of TPU chips is being rationed between external customers and internal use.
The potential revenue that TPUs could -- and likely will -- bring to the table in the near and distant future, however, is yet another good reason to take a swing at Alphabet stock.
NASDAQ: GOOGL
Key Data Points
Of course, the top reason to buy right now remains that shares of the powerhouse technology company are still down 15% from their mid-May peak, for reasons that most analysts don't agree with. The majority of Wall Street pros covering the ticker still rate it as a strong buy, with a consensus price target of $426.40. That's 24% above the stock's present price.
