Quantum computing is an incredibly promising technology. It could unlock new ways to solve some of the world's most complex problems. Multiple companies are investing heavily in this arms race, and businesses of all sizes are vying for quantum computing supremacy.
While some of the start-ups are intriguing, I prefer to focus on more established companies investing some of their vast resources into quantum computing. Two that top the list for me are Alphabet (GOOG +4.00%) (GOOGL +3.97%) and Microsoft (MSFT 0.63%). Both companies have resources that other companies could only dream of, which is why I think they will end up at the top of the quantum computing arms race.
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Quantum computing has a difficult problem to solve
Alphabet kicked off the quantum computing investment trend in December with the announcement of its Willow quantum computing chip. It announced a breakthrough that allowed it to arrange qubits on the chip so that there were fewer errors in the calculation.
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This is the primary problem quantum computing companies are facing, as quantum computing has inherent errors. Traditional computing transmits information in bits, either a 0 or a 1. There's no room for interpreting that signal incorrectly, so traditional computing isn't prone to the errors that quantum computing is.
Quantum computing utilizes qubits, which transmit information as the probability of an answer being a 0 or a 1. This has its perks and drawbacks. Qubits can transmit far more information about a calculation per unit. On the downside, there is room for errors to develop because the answer isn't explicitly a 0 or a 1.
Competitors have made multiple attempts to solve this problem, and each company has devised its own solution. Google's solution was to arrange the qubits in a grid-like pattern to reduce the number of errors each qubit has. Microsoft claimed to have created a new state of matter that allowed the particle to be controlled more precisely in its chip, which gave it far more accurate information. Time will tell which path is optimal, or if both are acceptable solutions to the same problem.
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But one thing is certain: Both companies have the resources to compete.
Both companies have financial resources the upstarts could only dream about
One of the more popular pure-play investments in the quantum computing arms race is IonQ (IONQ 1.20%). IonQ relies on external contracts to fund the company, which it realizes as revenue. In the first quarter, IonQ's revenue totaled just over $7.5 million. For both Microsoft and Alphabet, $7.5 million is a rounding error, and they can afford to throw far greater resources at quantum computing.
Free cash flow measures how much cash a company generates after operating expenses are subtracted. Over the past three years, both companies have hovered around the $20 billion per quarter mark, so investing $500 million or so each quarter in the quantum computing business wouldn't be that big of a deal for either company.
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This is a key factor in the AI arms race: The big tech giants can outspend the start-ups. While David and Goliath stories exist for a reason, with how much research and intense computing power are needed to get quantum computing to a usable point, I want to invest in the bigger players for quantum computing exposure.
As another benefit, they still have a strong base business to lean on if either of these two loses the quantum computing arms race. If one of the start-ups loses, it's done. This all-or-nothing investment style doesn't suit me, which is why the larger players with more resources are my top picks for the quantum computing arms race.
