Tech giants grapple with power demands as custom chips drive growth

AWS reported revenue of $45.98 billion, a 39% increase with a 38.7% operating margin. Executives attribute a portion of this margin to savings from custom silicon. Customers utilizing Amazon’s chips reportedly saved over $2 billion in the third quarter alone, and commitments for Trainium revenue have increased more than 20-fold. Amazon retains these savings as AWS profit, particularly within services like Bedrock.

Google Cloud’s revenue reached $30.71 billion, up 103%, with operating income rising to $11.12 billion from $3.59 billion. This growth is linked to strong demand for TPU systems, as CEO Sundar Pichai noted, “strong demand for our TPU systems across a wide range of customers.”

Amazon primarily keeps its chip technology in-house, while Google is exploring external chip sales, potentially starting in late 2027.

To manage increasing power needs, Amazon secures capacity commitments from large customers, sometimes reserving up to a gigawatt of capacity. CEO Andy Jassy indicated that new cloud capacity currently operates at a margin 3,500 basis points lower than long-leased data centers. Owning or leasing data center sites provides greater control over power connections. Amazon has also committed $1 billion to U.S. data center communities, acknowledging energy prices as a potential risk.

Alphabet’s rapid growth is impacting its financial health. Free cash flow fell to negative $9.06 billion, prompting the company to raise $28.7 billion through notes and equity sales. Google utilizes demand-response arrangements to reduce data center load during peak periods, but is also incurring debt and diluting shares to fund its expansion.

Analysts will be watching Amazon’s projected $220 billion in 2026 capital expenditures to see if payback periods continue to shorten as promised. For Google, the ability of TPU sales to offset rising interest costs will be a key indicator. Alphabet’s GAAP EPS of $2.12 fell short of the $2.97 estimate, partly due to a $0.55 loss from equity securities.

Over the past week, Amazon’s stock rose 7.88%, while Alphabet’s fell 18.75%. Amazon’s strategy of retaining chip savings within AWS and controlling its data center infrastructure currently provides a competitive advantage. Google’s growth trajectory could be threatened if its free cash flow doesn’t improve while Cloud continues its rapid expansion.