Alphabet Has an Nvidia-Like Business. It Could Be Worth Hundreds of Billions.
Alphabet has an Nvidia like business inside it. It could be the most valuable part of the internet search giant.
Some investors might not know that Alphabet has an AI chip business among its many segments. But it’s there: Alphabet’s internally designed chips end up in AI data centers and work in concert with products from Nvidia and others.
And, of course, the Google parent also has an AI business: Alphabet’s DeepMind is comparable to OpenAI.
Both businesses could be worth hundreds of billions and aren’t fully reflected in Alphabet’s stock price, analysts say.
“Is TPU [and] DeepMind Google’s most valuable business?” asked D.A. Davidson analyst Gil Luria in a Friday report. (Analysts, and many investors, still refer to Alphabet as Google.)
It’s a good question but requires some explanation.
TPUs, or Tensor processing unit s, are Alphabet’s chips. A TPU is “a matrix processor specialized for neural network workloads,” according to the company. That isn’t much help. Futurum Research explains that AI data centers have traditional CPU chips, GPU chips that Nvidia dominates, and TPU that, essentially, improve the performance of the AI computer. Microsoft, Amazon.com, and Alphabet—three big data center players—all have their own TPUs.
If Alphabet’s TPU and DeepMind were on their own, the value would be substantial.
“We believe the current value of a potential stand-alone TPU/DeepMind business may be over $700 billion, or as much as $60/share,” wrote Luria.
That’s a lot, considering Alphabet’s market value is about $2.5 trillion, with the stock currently trading around $200.
Luria is partially doing a so-called sum-of-the-parts, or SOTP, analysis of Alphabet, estimating what each business inside the company is worth. SOTP can be useful if a company is thinking about selling or spinning off a business—or if one business segment is losing money, masking the health of another part of a company.
Recently, SOTP chatter around Alphabet increased after the U.S. government won an antitrust battle labeling Google Search a monopoly. Remedies the government could try and impose might include a breakup of the company.
Any valuation methodology has its limitations. SOTP isn’t particularly useful when things are going well or when businesses are significantly interconnected. Alphabet’s chips are going into its cloud business and DeepMind’s AI improves its search business.
SOTP also isn’t as helpful as traditional valuations when there is little chance a split or sale is coming. That point is a reason why Luria rates Alphabet stock Hold.
“We are waiting for the company to indicate it is willing to release some of the SOTP value to shareholders, and until then maintain a [Hold] rating.” His price target is $200 a share.
Alphabet stock rose 1.1% on Friday, closing at $200.21, while the S&P 500 and Dow Jones Industrial Average fell about 0.3%.
Still, SOTP can help investors better understand businesses owned—and what’s possible for those businesses.
Barron’s recently wrote positively about Alphabet, believing the value of its various businesses wasn’t accurately reflected in the current stock price. Since the article appeared, Alphabet stock has gained about 22%.