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Why Alphabet Stock Popped on Wednesday

Source The Motley Fool

Key Points

Piper Jaffray says AI chips from Taiwan Semiconductor are sold out through H1 2028.
TSMC is Google's biggest contract manufacturer of TPU AI chips.
10 stocks we like better than Alphabet ›

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock gained 2.8% through 11:20 a.m. ET Wednesday on a positive prognosis from Piper Sandler regarding the artificial intelligence industry.

Turns out, Taiwan Semiconductor Manufacturing Company (NYSE: TSM), which manufactures advanced AI semiconductor chips for Alphabet on contract, is "sold out through the first half of 2028."

Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »

Image source: Getty Images.

What this means for Alphabet

For Alphabet, the first implication of this observation is that the artificial intelligence revolution isn't likely to slow down anytime soon. AI hyperscalers are still buying AI and memory chips hand over fist, and even buying in advance to secure supply down the road.

Given that Alphabet is one of the biggest hyperscalers, this suggests that Alphabet's AI business is also continuing to boom. And here's a secondary implication that investors in the semiconductor industry need to be aware of.

More than just an AI chip buyer, Alphabet has also become an AI chip supplier with its production of TPU chips. Sales of these chips -- designed by Google but produced by TSMC -- began generating revenue for Alphabet last quarter. Piper estimates that GPUs and ASICs (including Google's TPU) combined will reach 14 million units sold this year, then grow 50% in 2027 and another 40% in 2028.

And ASICs in particular will make up 66% of these shipments.

The upshot for investors

Alphabet stock is valued at an eye-watering $4.1 trillion today, but with trailing earnings topping $244.2 billion, that still works out to a price-to-earnings ratio of only 16.8 on the tech giant. That's not a lot to pay for a company that most analysts agree will grow earnings at 14.6% annually over the next five years.

Factor in today's good news, and things are looking really good for Alphabet.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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