Quantum computing doesn't receive nearly the amount of headlines that artificial intelligence (AI) does, but it should. While AI transforms how we work and interact, the technology still has limitations. If quantum computing-powered AI technology becomes available, we could see many jaw-dropping breakthroughs, taking AI and other technologies to new heights.
This makes quantum computing an exciting technology, but investing in it is tricky. There are two ways to invest in this trend: Buy the tech behemoths or buy the start-ups. This is a very tricky decision for investors, as each has pros and cons.
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Investing in existing tech giants or start-ups is a difficult decision
The quantum computing race is filled with established names like Alphabet (GOOG -0.40%) (GOOGL -0.38%), Microsoft (MSFT -0.71%), IBM (NYSE: IBM), and others. These companies have been around for a long time and have established businesses that have nothing to do with quantum computing. This gives this group of competitors two primary edges over start-ups.
First, they have much greater resources than start-ups. For example, Alphabet and Microsoft produced $19 billion and $20 billion in free cash flow last quarter, respectively. This metric is calculated by subtracting capital expenditures from operating cash flow and shows how much excess cash a business generates every quarter. With Alphabet and Microsoft generating around $20 billion each quarter in excess cash, they can throw vast resources at quantum computing technology.
Second, because both companies have established base businesses, they don't necessarily have to win the quantum computing arms race. This makes the investment much safer, as it isn't an all-or-nothing bet.
On the flip side, if one of the big tech companies wins the quantum computing race, it won't have nearly the effect on its stock price as it would if you had invested in a start-up like IonQ (IONQ -1.10%) or D-Wave (QBTS 0.14%).
Companies like these are quantum computing pure plays that get their funding from various contracts and partnerships they have established. IonQ's biggest contract is with the Air Force Research Lab. D-Wave has already made a handful of sales of its quantum computing systems, so it's starting to kick off a period of self-funding rather than requiring external funding.
If these companies establish themselves in the quantum computing world and generate significant sales and profits, their returns could be explosive, which is why investors are so excited about investing in such businesses.
But which cohort is the best group to buy now?
A mixture of both types of investments is a smart move
It's sometimes smart to take a basket approach on stocks when investing in a trend like this. This involves taking positions in multiple companies to spread out the risk, while also allowing you to own the inevitable winner, although it's impossible to know which company is on the right track today.
This is a wise idea, as it allows you to own stocks like Alphabet and Microsoft and own a fantastic business in its current state while also holding stocks like IonQ and D-Wave, which will be incredibly volatile as various headlines and press releases impact their stock price.
So, for a list of four quantum computing stocks, I'd think an investment in Alphabet, Microsoft, IonQ, and D-Wave would be a smart idea, as it helps balance out the risk a bit while giving you access to companies with massive upside.
It won't be long before we know the impact of quantum computing, as D-Wave's sales will tell if quantum computing can become a viable technology.
I'm excited to see what quantum computing can offer the world, and investing in these four stocks gives investors the best chance to capitalize on the growth of this emerging sector.
