Alphabet's New Growth Engine Is Something Investors Can't Miss

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has a new growth trick up its sleeve. There have been rumors surrounding this new business for a long time, but they were finally confirmed in the first quarter of this year: Alphabet is directly selling some of its Tensor Processing Units (TPUs) to select clients. As a result, the growth rate of its cloud business skyrocketed.

Investors won't want to overlook this new investment angle to Alphabet's stock, as it could make the company one of the best investment opportunities in the artificial intelligence (AI) space.

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TPUs offer superior cost advantages to GPU-based training

GPUs (graphics processing units) are still the primary hardware deployed to train and run AI models. Demand for them is why Nvidia (NASDAQ: NVDA) has become the largest company in the world, but Alphabet may be on course to capture that crown. Alphabet (in collaboration with Broadcom) developed the TPU, an application-specific integrated circuit designed precisely to handle AI and machine learning workloads. In those applications, TPUs can outperform GPUs from a cost perspective. That's a huge deal, and it's one of the primary reasons that Alphabet's generative AI models are among the cheapest to use.

Previously, if you wanted access to TPUs, you had to rent them through Google Cloud. Now, some companies are purchasing them and deploying them into their own data centers, a fact that Alphabet confirmed on its quarterly conference call late last month, when management noted that TPU sales would be included in Google Cloud revenue.

In Q1, Google Cloud's revenue soared by 63% year over year. Its operating margin also dramatically improved from 19% last year to 33% this year. Those huge boosts were a big part of the reason Alphabet's overall revenue and operating income grew by 22% and 30%, respectively, in Q1.

The strength of the Google Cloud business and the boost it's getting from TPU sales make Alphabet an excellent AI investment. While many may focus on the generative AI models themselves, the big money being made now from the AI build-out is coming from cloud computing and hardware sales. With Alphabet capturing both of these growth levers, and clearly excelling in both arenas, I think it's among the best AI stocks to buy now and hold onto. Few companies can match Alphabet when it comes to the ability to fund their AI efforts (thanks to its cash-cow Google Search business), and this advantage will ensure Alphabet remains one of the largest companies on earth when the dust settles from the AI build-out.

Keithen Drury has positions in Alphabet, Broadcom, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Broadcom, and Nvidia. The Motley Fool has a disclosure policy.