Google is stockpiling TPUs in pursuit of artificial general intelligence.

Google's parent company, Alphabet, is strategically managing its array of AI accelerators, focusing primarily on advancing artificial general intelligence (AGI) rather than fully utilizing them for client rentals.

During the second quarter earnings call, CEO Sundar Pichai outlined the company’s emphasis on AGI development. He confirmed that Alphabet has successfully begun selling its tensor processing units (TPUs) to select customers and addressed a question from Goldman Sachs analyst Eric Sheridan about how the company balances its internal processing needs against external demand.

Pichai explained, “In terms of allocating our TPUs ... our first priority is ensuring we are positioned to compete at the forefront of AGI development,” highlighting the significance of human-like AI capabilities to the company’s overall mission.

Analyst Mark Shmulik from Bernstein also raised the topic of how Alphabet distributes processing resources among its various sectors, including search, cloud services, and AI model training. Pichai reiterated that AGI remains the baseline for resource allocation, stating that the company is also focusing on essential areas like Search, YouTube, and Cloud. Specifically, he noted that compute resources are being targeted to support models within the Vertex and Gemini Enterprise frameworks, along with critical services in data analytics and cybersecurity.

The performance of Google’s core services has been notably strong. The Google Cloud sector saw an impressive 82% year-over-year revenue increase, reaching $24.75 billion for the quarter and yielding an $8.8 billion profit, a remarkable growth of 214%. This surge is attributed to rising demand for AI infrastructure and solutions. With a substantial $514 billion in future service commitments, the G-Cloud anticipates further growth.

Additionally, search revenue rose by 17%, while YouTube ad revenue increased by 13%. Despite initial concerns that generative AI might disrupt Google’s search ad revenue, Pichai stated that the introduction of AI Mode in search has actually led to an increase in overall search queries.

AI search requires specialized hardware that can be costly to acquire and maintain. Nevertheless, Pichai announced that through engineering and hardware optimizations, Google has successfully reduced the cost of responses from AI Mode to its lowest rate since its introduction, even while enhancing the underlying capabilities.

The company is making significant investments in AI infrastructure, with CFO Anat Ashkenazi indicating plans to allocate between $195 billion and $205 billion in the current financial year, an increase from earlier projections of $180 billion to $190 billion. However, Ashkenazi noted that constraints in supply have necessitated a short-term strategy involving increased reliance on third-party computing capacity as the company builds its own infrastructure.

Pichai mentioned that this strategy for acquiring additional capacity will enable Google to secure major cloud clients. He stated, “We are trying to support very large customers during this extraordinary time,” emphasizing the importance of balancing short-term costs with long-term returns in these multi-year engagements.

For the quarter, Alphabet reported a total revenue of $119.8 billion, up 24% from the previous year, and an operating income of $40.8 billion, a 34% increase. However, despite this financial success, the company recorded a free cash flow of -$5.9 billion, marking the first occurrence of negative cash flow since 2004. This prompted a four percent drop in the company’s stock price during after-hours trading, reflecting investor concerns.