Alphabet's TPU Chip Sales Drive Growth Amidst Stock Slump
Alphabet's stock has been lagging behind the S&P 500 in recent months, returning negative 6.8% over the past three months while the index returned 3.6%. One potential reason for this underperformance is the company's shift towards selling its custom-built TPU chips to customers, a move that management believes will expand Alphabet's total addressable market.
In the second quarter of 2026, Alphabet began recognizing revenue from TPU system sales shipped into customer data centers. This new revenue stream has contributed to the growth in Google Cloud's backlog, which reached $514 billion at the end of the second quarter, up from $462 billion at the end of the first quarter.
Management expects just over half of this backlog to be recognized as revenue within 24 months of the second quarter of 2026, amounting to roughly $260 billion. This contracted run rate is expected to sustain top-line growth rather than transform the company's trajectory overnight.
However, Alphabet plans to expand its use of third-party capacity in the third quarter of 2026 as a bridge while it builds more of its own TPU systems. This move will create modest margin pressure in the near term and may be a critical test for whether this hardware expansion maintains capital efficiency.