Quantum computers have the potential to complete certain types of computations exponentially faster than traditional computers. While the technology is far from commercially viable today, quantum computers could eventually revolutionize materials science, drug discovery, financial modeling, artificial intelligence (AI), logistics, and other areas.
Investing in pure-play quantum computing stocks is a gamble since useful quantum computing could still be a decade or more away. Instead, investors should focus on large, diversified technology giants that have a good shot at emerging as quantum computing leaders. The two best bets right now are International Business Machines (IBM +1.25%) and Microsoft (MSFT +1.08%).
Decades of quantum innovations
IBM has been involved in quantum computing research for decades, starting with the first 2-qubit quantum computer back in 1998. A few years later, IBM used a quantum computer to successfully factor a small number -- a breakthrough at the time.
In 2016, the company made a quantum computer accessible via its cloud platform, enabling anyone to run quantum computing experiments. Today, IBM has scaled its quantum computers up to 127 qubits, and its roadmap calls for full error correction by 2029 and quantum-centric supercomputers with thousands of qubits beyond 2033.
NYSE: IBM
Key Data Points
While quantum computers may still be many years away from solving real-world problems faster than traditional computers, IBM has already turned quantum computing into a meaningful business. Since the start of 2017, the company has booked close to $1 billion worth of related business. Its vast client base and decades-long relationships give it an edge as enterprises and governments test and experiment with quantum computers.
For investors, the potential of IBM's quantum computing business makes an already attractive stock even more attractive. The company expects its revenue growth to accelerate this year to more than 5%, driven by hybrid cloud computing and AI. IBM's AI-related bookings now surpass $5 billion, as customers take advantage of the company's consulting services and watsonx platform. Free cash flow is on the rise, as well, with IBM predicting about $13.5 billion in free cash flow for 2025.
The company trades for around 17 times that free-cash-flow guidance. That's not an obvious bargain, but quantum computing has the potential to grow into a multibillion-dollar business down the road, and IBM stock is a relatively low-risk way to bet on the quantum computing revolution.
Exotic quantum chips
Microsoft surprised the quantum computing world last month when it unveiled a new quantum computing chip that used the properties of an exotic type of particle. The company successfully built an 8-qubit quantum chip and encoded quantum information using these exotic particles, which are more stable and less prone to errors than other methods of constructing qubits.
NASDAQ: MSFT
Key Data Points
Importantly, Microsoft sees a path to scale up this quantum computing chip to 1 million qubits. There are still problems that need to be solved, including figuring out new methods of error correction.
The plan is to build a fault-tolerant prototype within a few years and then work toward scaling that up, detecting errors, and eventually correcting those errors. Because Microsoft is building a quantum chip rather than a large stand-alone quantum computer, these chips could one day be installed in the company's cloud data centers and be made available to its customers.
Meaningful revenue from any of its quantum computing efforts is most likely many years away, but there are plenty of other reasons to buy Microsoft stock. The company is a leader in the cloud computing business and is investing heavily in AI infrastructure as it looks to lead there, as well. Total revenue has been growing at a double-digit rate, and AI-related revenue is now at a $13 billion annual run rate.
Microsoft isn't a cheap stock, trading for nearly 30 times forward earnings. But with strong cloud and AI businesses, coupled with the potential to be a leader in quantum computing down the road, the company is another good way to bet on quantum computing.
