Shares of Google parent Alphabet (GOOGL +3.57%) (GOOG +3.52%) shot nearly 6% higher after the company announced the release of a quantum computing chip. On Monday, Dec. 9, the company made public its Willow quantum computing chip, claiming it could solve a problem in five minutes that would take more time than the history of the universe on a traditional computer.
Nonetheless, what may be more important to investors is the implications for its stock. While the direct effects of quantum computing on Alphabet stock are unclear, the breakthrough could reassure investors about the Google parent's ability to transform the company. Here's how.
NASDAQ: GOOGL
Key Data Points
The state of Alphabet's stock
Despite a gain of over 35% for the year for Alphabet stock, the company has appeared to struggle over the last couple of years. The rise of ChatGPT has led to fears that the company's Google search engine may become obsolete.
Alphabet responded with its own generative AI product, Google Gemini, a short time later. Still, it remains unclear what Gemini will do to stem a potential loss of Google Search users.
Moreover, even though Alphabet has diversified into other businesses such as Google Cloud, revenue driven from advertising tied to searches is the company's largest source of income. This has led to the stock's relative underperformance compared to other mega-cap stocks. Consequently, Alphabet's 25 P/E ratio is the lowest among "Magnificent Seven" stocks.
GOOGL PE Ratio data by YCharts
Can quantum computing help?
However, the future of quantum computing is possibly bright but uncertain. While the ability to exponentially increase computing speeds is a positive, few practical applications for it have emerged, meaning the technology may have progressed faster than the need for it.
Furthermore, the basic building blocks of quantum computing technology, known as qubits, are notoriously unstable and error-prone. Fortunately, Willow made a breakthrough with its ability to string together qubits, meaning that fewer errors will occur as the number of qubits rises. That could bode well for the technology and make Alphabet a quantum computing leader, assuming users find applications for the technology.
Alphabet's diversification
Moreover, investors often forget that Alphabet sits on a staggering $93 billion in liquidity. That is down from $111 billion at the end of 2023 as the company invests in dividend payments, artificial intelligence (AI), and other technologies such as quantum computing.
Nonetheless, that represents more than enough liquidity to foster new revenue sources. Also, the $48 billion in free cash flow generated in the first nine months of 2024 will ensure it can fund continued diversification.
Alphabet has diversified its revenue base, albeit slowly. Admittedly, the fact that 78% of company revenue in Q3 2024 came from advertising may seem discouraging, especially since that is only down from 81% over the last three years.
Still, during that time, Google Cloud's share has risen to 13% in Q3 2024 compared to 8% during the same quarter of 2021, showing that Alphabet's revenue streams continue to diversify. Thus, if it finds comparable success with quantum computing or another application, it can still prosper even if users lose interest in Google Search.
Will quantum computing make Alphabet stock a buy?
How much quantum computing will ultimately contribute to Alphabet's revenue is unknown at this time. Hence, it is probably not a direct reason to buy stock in the Google parent.
Instead, the focus should probably be on how Willow could become an indirect reason to buy Alphabet, namely, its ability to reinvent itself. Indeed, it is possible that ChatGPT could make Google Search obsolete, and its release of Google Gemini may only do so much to help.
However, Alphabet's success with Google Cloud had already begun to reduce its dependence on advertising. Moreover, it holds a staggering amount of liquidity and continues to generate tens of billions of dollars in free cash flow.
Hence, Willow potentially shows what Alphabet can do to diversify its revenue base. Even if it does not ultimately become a major revenue source, its efforts could help make Alphabet an influential presence in the tech world regardless of Google Search's popularity.
