For the past few years, investors have become enamored with the prospects of artificial intelligence (AI) technology. But for the most part, developers have been touting the same carousel of ideas -- explaining how AI is leading to breakthroughs in training large language models, helping build autonomous systems for vehicles, and bringing unprecedented levels of efficiency to the workplace.
Although these use cases fetched a lot of intrigue for a while, investors are beginning to look for something new to get excited about now. Enter quantum computing -- a pocket of the AI realm management consulting firm McKinsey & Co. estimates to be worth $1.3 trillion by 2035. Essentially, this form of computing uses principles of quantum mechanics to
For the past several months, executives at the largest AI businesses have started talking about the next revolutionary phase of modern computing. As is typical for a new megatrend, loads of companies are now marketing themselves as quantum computing darlings -- parroting talking points about how the technology is poised to benefit high-priority areas in healthcare, cybersecurity, and financial services, just to name a few.
Let's explore which companies are making waves in the world of quantum computing, and assess what opportunities are best for investors with a long-term time horizon.
These quantum computing stocks are getting loads of attention, but...
Seasoned investors know all too well that whenever a hot new area emerges within an already popular theme, opportunities seemingly begin popping up out of the woodwork. Take a look at the chart below and try to spot the anomaly.
Do you notice anything a little odd? The share price returns for quantum computing stocks Rigetti Computing, IonQ, Quantum Computing, and D-Wave Quantum absolutely trounce the returns across both the S&P 500 and Nasdaq Composite over the last year. To add an extra layer of weirdness here, the share prices for these quantum computing stocks barely moved between January and October 2024 -- and then suddenly, they popped exponentially.
If you've never heard of these companies, there are good reasons. Chief among them is that each company above is only generating nominal levels of revenue. This makes sense, as quantum computing does not have much in the way of utility given the current state of the AI narrative. In other words, while the idea of quantum computing technology is exciting, there isn't much application for it today.
RGTI Revenue (Quarterly) data by YCharts
Nevertheless, the companies explored above have all managed to trade at valuation multiples that are completely disconnected from their underlying business trends (i.e., low revenue, heavy cash-burning operations).
Given the upside-down financial profiles of these companies, I'm hard-pressed to buy into a narrative that any of them will be around decades from now. Instead, let's look at some other opportunities that look better positioned for the long haul.
Image source: Getty Images.
...these magnificent opportunities look better positioned for the long term
By now, I'm sure you're well aware that the "Magnificent Seven" stocks -- Amazon (AMZN 0.87%), Apple, Alphabet (GOOG 0.58%), Microsoft (MSFT 1.57%), Meta Platforms, Tesla, and Nvidia (NVDA 1.56%) -- dominate the AI narrative. For the most part, each of these companies hovers around overlapping use cases in AI -- from workplace productivity software, semiconductor chips, social media, self-driving cars, cloud infrastructure, and more.
NASDAQ: NVDA
Key Data Points
However, Amazon, Alphabet, Microsoft, and Nvidia have all quietly been showcasing their own forms of progress in the area of quantum computing as well. For example, Amazon, Alphabet, and Microsoft have all developed their own series of quantum chips. In addition, Nvidia offers an extension of its compute unified device architecture (CUDA) software platform specifically geared toward quantum computing.
The jaw-dropping returns from IonQ, Rigetti, D-Wave, and Quantum Computing are rooted in hype around the idea of quantum computing and what opportunities might be multibaggers in the future. By contrast, Nvidia, Amazon, Alphabet, and Microsoft all have much stronger financial horsepower that allows them to consistently invest and hone their quantum roadmaps without taking a toll on existing AI initiatives that are actually being monetized as it stands today.
Furthermore, given that these Magnificent Seven cohorts have already built large and thriving AI businesses, quantum computing represents another thread that could stitch their broader AI ecosystems together -- helping them build even stronger businesses poised to grow for decades down the road.
While the Magnificent Seven stocks are currently under pressure during the ongoing Nasdaq sell-off, each company remains in a solid financial position for the long run. I see Nvidia, Alphabet, Amazon, and Microsoft as far superior opportunities compared to the more speculative names I explored above.
