2 Stocks to Buy as Google Starts Selling Its AI Chips

For years, Google's custom artificial intelligence (AI) chips, called tensor processing units (TPUs), could be rented through Google Cloud but not bought -- Google didn't sell them. That changed in the second quarter, when Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) delivered TPU systems to customer data centers for the first time and began recognizing revenue from the sales.

The dollars are small so far.

Alphabet has signed only a limited number of agreements, with customers that run their own infrastructure for specialized, high-scale AI workloads. And it said the significant majority of the revenue from those deals will arrive in 2027.

Still, a new product line at a $4 trillion company is worth following.

Two stocks collect on those sales. Broadcom (NASDAQ:AVGO) develops and supplies the chips. And Alphabet itself books the sale -- and keeps the customer.

Image source: Getty Images.

1. Broadcom gets paid no matter who buys

In April, Broadcom disclosed a long-term agreement to develop and supply custom TPUs for Google's future generations of the chips. A second agreement has Broadcom supplying networking and other components for Google's next-generation AI racks through up to 2031. In other words, Broadcom gets paid on TPUs wherever they end up -- Google's own data centers, its cloud, or now a customer's facility.

On Broadcom's fiscal third-quarter earnings call earlier this month, CEO Hock Tan said he expects AI company Anthropic to deploy another 5 gigawatts of next-generation TPU computing capacity in 2027, after 1 gigawatt this year.

The money is already showing up. Broadcom's AI semiconductor revenue was $10.8 billion in its fiscal 2026 second quarter (ended May 3), up 143% year over year. It hit $16.7 billion in the fiscal third quarter, reported earlier this month -- growth of 221% year over year and 54% from the prior quarter. And management guided for about $21.7 billion of AI semiconductor revenue in the fiscal fourth quarter, which would be 236% growth. In short, growth is accelerating, not slowing. Helped by that momentum, Broadcom's total revenue rose 86% year over year to $29.6 billion, and free cash flow nearly doubled to $13.7 billion, or 46% of revenue.

Sure, customer concentration is arguably the stock's biggest risk. Broadcom's top five end customers accounted for about 55% of its revenue in the fiscal third quarter, and any one of them changing course could hurt. But shares cost about 18 times the earnings analysts expect for Broadcom's next fiscal year, and the stock is down about 31% from its 52-week high of $495 as of this writing. I'd argue that's an attractive price for a business growing this fast.

2. Alphabet gets paid twice

Alphabet earns on a TPU sale in a way no chipmaker can. It books the sale itself (the systems include hardware, software, installation, and support), and the buyer stays a Google customer.

"We also began to recognize revenues from TPU system sales, which we delivered to customer data centers for the first time in Q2," chief financial officer Anat Ashkenazi said on Alphabet's second-quarter earnings call.

The same chips are doing quieter work inside Google Cloud, where customers rent TPUs instead of buying them.

Cloud revenue grew 82% year over year to $24.8 billion in the second quarter. Profitability improved even faster. The segment posted operating income of $8.8 billion, up from $2.8 billion a year earlier, and its operating margin climbed from about 21% to about 36%.

Notably, Google Cloud's backlog (which includes the TPU sales agreements) grew by more than $50 billion sequentially to $514 billion.

Of course, selling hardware typically carries lower margins than advertising or cloud services, and inventory costs from the TPU systems Alphabet sells are already lifting its cost of revenues. The spending is enormous, too: Management raised its 2026 guidance for capital expenditures to a range of $195 billion to $205 billion.

But Alphabet's forward price-to-earnings ratio sits near 23, and the stock is about 16% off its 52-week high of $408.61. That still looks reasonable to me, even with the TPU business in its early innings.

Why I'd own both

Ultimately, these two stocks are different ways of getting paid on the same systems. Broadcom collects on the chips wherever they land, and it trades at the lower forward price-to-earnings ratio of the pair. Alphabet's TPU revenue, meanwhile, is a small piece of a much larger business, with advertising profits funding the build-out.

I'd buy both stocks today.

Broadcom is the more direct play on the chips themselves, while Alphabet offers the chips plus the cloud they power. Both stocks sit well below their highs while their AI revenue accelerates. I think the pair is worth owning here.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Broadcom. The Motley Fool has a disclosure policy.