Alphabet's Custom Silicon Pays Off Amidst NVIDIA Pricing Power
Alphabet's (GOOGL) Google Cloud experienced significant growth in Q2 FY2026, expanding by 82% year-over-year. In contrast, Amazon's (AMZN) AWS grew at a more modest 37%. However, despite the difference in cloud growth rates, Alphabet trades at a lower forward price-to-earnings ratio of 17 compared to Amazon's 32.
The disparity can be attributed to NVIDIA's (NVDA) pricing power, which has become a substantial expense for hyperscalers. Alphabet's ownership of custom silicon, specifically Tensor Processing Units (TPUs), enables it to reduce its dependency on merchant Graphics Processing Units (GPUs). This strategic move has allowed Alphabet to maintain a lower operating margin and allocate more resources to investing in its cloud business.
In contrast, Amazon relies heavily on NVIDIA GPUs for its AWS platform. Although Amazon's Trainium chip is gaining traction, the company still requires significant investments in external GPU infrastructure. As a result, Amazon's free cash flow has turned negative, and it has increased its capex guidance to $200 billion.