Quantum computing stocks have been quite volatile over the past six months. Investors get excited about their prospects and immediately sell if the market goes into risk-off mode. However, this primarily occurs with pure quantum computing plays, such as stocks like IonQ (NYSE: IONQ) or Rigetti Computing (NASDAQ: RGTI). These companies have promising technologies in the quantum computing space, but they're not my top pick.
Instead, I prefer more mature companies that can devote significant capital to quantum computing research, rather than relying on external funding. This includes companies like Alphabet (GOOG -0.51%) (GOOGL -0.48%), Microsoft (NASDAQ: MSFT), IBM (NYSE: IBM), and more. Of the large-cap tech companies competing in the AI arms race, Alphabet is my favorite, as it kicked off the quantum computing investment hype in December 2024.
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Alphabet initiated the quantum computing investment trend in December
In December, Alphabet announced a breakthrough with its Willow quantum computing chip. It appears to have solved one of the major problems in quantum computing: errors. Quantum computing differs from traditional computing in that it doesn't transmit information using bits (either 0s or 1s). Instead, it uses qubits. Although the end value is a 0 or a 1, a qubit uses a superposition of a particle to reach that result. This is better described as a range of numbers from 0 to 1, which isn't an exact value. This can lead to errors, which undermine the entire principle of computers.
Alphabet figured out that arranging the qubits in a certain pattern reduced errors, which allowed it to solve a problem that would have taken the most powerful supercomputer 10 septillion years (a "1" with 25 trailing zeros after it) to solve. This test is biased toward quantum computers, as it tackled a problem that can only be solved by using quantum computing techniques. But it demonstrated that accurate quantum computing is feasible.
While Alphabet's competitors (whether large companies or smaller ones) are also working on solving this problem, I still like Alphabet for a simple reason: It has the cash flows to continue funding this resource. Over the past 12 months, Alphabet generated over $70 billion in free cash flow. Meanwhile, companies like IonQ and Rigetti Computing are receiving contracts that top out at around $100 million, they only have one or two of those, and that cash is expected to be spent over the years, not in just one.
This makes me more bullish on a company like Alphabet in the quantum computing arms race, as it can easily devote a few billion dollars to quantum computing research. Furthermore, it could also easily buy one of the quantum computing start-ups if it felt that the technology that company was developing was more advanced than its own.
Lastly, Alphabet's primary business isn't quantum computing; it's advertising. This means Alphabet doesn't have to win the quantum computing race to succeed; the smaller start-ups do. This all-or-nothing approach isn't for me, as I don't like seeing investments go to $0. That's a real possibility when investing in quantum computing start-ups. Additionally, we're still a few years away from widespread quantum computing being available, and being early to this investment trend may not work out in the end.
These are my primary reasons for choosing Alphabet as my top quantum computing pick. Still, you could easily substitute any big tech company with quantum computing investments into Alphabet's role. However, Alphabet's stock looks like a screaming bargain right now, so it's on the top of my list.
Alphabet's stock looks dirt cheap
Even though Alphabet is posting strong results, its revenue grew 12% in the first quarter, diluted earnings per share rose 49%, and the stock trades for a mere 17.5 times forward earnings.
GOOGL PE Ratio (Forward) data by YCharts
Considering that the broader market, as measured by the S&P 500 index, (^GSPC 0.21%) trades for 22.4 times forward earnings, this looks like a screaming deal.
I'm not sure how the quantum computing arms race will play out, but I believe Alphabet will greatly benefit from it. Even if it doesn't, it still has a strong base business to lean on. With how cheap the stock is today, it seems like a no-brainer buy right now.
