Over the last few months, small-cap stocks such as Rigetti Computing, D-Wave Quantum, and IonQ have burst onto the scene in the realm of artificial intelligence (AI). Each claims to be making groundbreaking progress in a hot new field known as quantum computing.
Predictably, droves of investors have flocked to these stocks in hopes of finding the next golden opportunity involving AI. Here's the problem: Many companies working on quantum computing are still in development stages -- generating very little (if any) revenue, and burning heaps of cash.
This isn't to say that investing in quantum computing is a poor idea. I would just encourage investors to think bigger-picture and consider which existing movers and shakers in the AI domain could also play a role in the development of quantum computing.
To me, one of the best companies that fit this criterion is Nvidia (NVDA 0.61%). Let's dive into why Nvidia looks well positioned to dominate the quantum computing arena, and assess why shares look reasonably valued right now.
NASDAQ: NVDA
Key Data Points
Nvidia is the nucleus of the AI movement
My bet is that for the last two years, you've been bombarded with information about Nvidia and its graphics processing units. GPUs are advanced pieces of hardware that are capable of running algorithms and computations at continuous high speeds. Many generative AI applications such as large language models (LLMs) and machine learning protocols rely heavily on GPU chips.
What you may not realize is that Nvidia's influence in the GPU market is not solely predicated on the company's hardware. It also has a flourishing software platform, originally dubbed Compute Unified Device Architecture. Now usually known simply as CUDA, it's almost like Nvidia's secret weapon, as the software runs parallel to the company's GPUs. In other words, using Nvidia chips with software from another provider is an enormous pain and can slow down a customer's AI progress considerably.
The one-two punch of GPUs and CUDA has helped Nvidia stitch together quite a lucrative AI fabric. Now, Nvidia is taking this combination to the next level, as quantum computing presents another meaningful opportunity, even though the company receives little attention in discussions of this technology.
Image source: Getty Images.
Quantum computing could be massive for Nvidia
In early January, Nvidia CEO Jensen Huang predicted that commercially available quantum computing applications won't be here for another 20 years. While that might not be great for Rigetti, D-Wave, or IonQ, I see Huang's outlook as incredibly bullish for Nvidia.
During the same speech, Huang spoke at length about how Nvidia is parlaying its capabilities with CUDA into the area of quantum computing. It now offers a new architecture known as CUDA-Q, specifically programmed for supercomputing and quantum mechanics.
Although the number of legitimate use cases for quantum computing is limited today, I think CUDA-Q could become a pillar supporting Nvidia's growth over the next several years or decades. Furthermore, I think the company could mimic its existing strategy -- essentially locking in customers to using end-to-end Nvidia infrastructure across hardware and software -- as it scales up its quantum computing operation.
Is Nvidia stock a buy?
Right now, there is a lot of volatility surrounding Nvidia stock. Over the last month, shares dropped by as much as 15% -- erasing nearly $600 billion in market value. The driver of this sell-off revolves around a rival AI platform from China, called DeepSeek. Namely, DeepSeek claims to have trained its AI models by using Nvidia's older GPU architectures as opposed to its newest products. As such, some investors have questioned if Nvidia's influence in the AI realm is on the decline.
But here's the thing: over the last few weeks, more news surrounding DeepSeek has come to light. Many analysts and AI enthusiasts are proclaiming that DeepSeek likely used more sophisticated methodologies than its leading on. Moreover, hyperscalers Microsoft, Amazon, and Alphabet, as well as social media behemoth Meta Platforms are expected to continue spending heavily on AI infrastructure this year. That's great news for Nvidia, who works closely with each of these "Magnificent Seven" peers. As such, Nvidia's share price has rebounded entirely from its intra-year lows as fears surrounding DeepSeek have dissipated.
With all of that in mind, Nvidia currently trades at a forward price-to-earnings (P/E) multiple of 31; its ratio of price to free cash flow (P/FCF) is 61. As the chart below illustrates, both of these valuation multiples appear reasonable considering their historical averages:
NVDA PE Ratio (Forward) data by YCharts.
Given Nvidia's reasonable valuation, its solid grip on the GPU market, and strong secular demand for AI infrastructure, it's not surprising that Wall Street's consensus price for the stock is $170 per share -- implying at least 23% upside from current levels.
While the baseline view is that Nvidia stock should continue rising throughout 2025, I'd urge investors to think longer-term. Given how far away quantum computing is from becoming mainstream, the prospects of this technology aren't even really being considered by analysts yet. That's also an important point to make, as Nvidia's consensus price target among analysts remains strong -- despite the initial trepidation presented by DeepSeek.
Not only do I see Nvidia as a screaming buy right now, but I also think the stock is a compelling opportunity to hold: CUDA-Q is likely to emerge as another major segment of the business, thanks to quantum tailwinds.
