Few investment sectors have experienced larger share price gains over the past year than quantum computing. While these stocks are highly speculative, the potential of the technology and their incredible rise have caught the attention of billionaires and hedge funds on Wall Street.
While retail investors should keep an eye on what the "smart money" is up to, they should also be sure to do their own due diligence. That's because the billionaires who run their own hedge funds may not necessarily be involved in all day-to-day investment decisions. Hedge funds also tend to invest on shorter time horizons.
That said, when a group of billionaires buys a stock, it can certainly be a bullish indicator. In the second quarter, billionaires and their funds piled into a quantum computing stock that has risen 2,640% over the past year.
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A different approach to quantum computing
Quantum computers are viewed as the next iteration of the computer, so if they can be commercialized to the masses, there is an enormous opportunity for any company that can get in early.
Computers are built on the foundation of bits, the smallest units of digital data. Quantum computers largely rely on qubits, which are like bits but in a state of superposition. This allows them to process more data simultaneously and therefore consider more solutions at the same time, giving them significantly more computing power than what's available today.
The company D-Wave Quantum (QBTS 12.83%) takes a unique approach by not only focusing on the more traditional gate-based quantum computing, which is being used more broadly across the sector, but also on a process known as quantum annealing, which is believed to be a better approach for more focused optimization problems.
Quantum annealing makes it easier for quantum computers to scale with more qubits, and the more qubits a quantum computer has, the more powerful it is likely to be. But in quantum annealing, the qubits are more difficult to manipulate, potentially making them less effective than in a gate-based system.
NYSE: QBTS
Key Data Points
There is some dispute about D-Wave's approach. In June, according to Investor's Business Daily, Global Quantum Intelligence's Chief Content Officer Doug Finke told the publication that D-Wave's ability to offer both types of quantum systems would make them a standout and give customers more flexibility. However, Finke also acknowledged that some experts believe quantum annealing could get phased out down the road once gate-based systems become more powerful and better at correcting errors, eventually gaining the ability to compute any kind of problem.
Either way, D-Wave is still a big part of a growing but small industry and has made significant progress on the technology, which is why the company's stock is up over 3,460% in the past year. Billionaires have taken notice and piled into the stock in Q2.
- Billionaire Paul Tudor Jones' fund, Tudor Investment Corp, initiated a new position and purchased 827,416 shares.
- Billionaire Ken Griffin's fund Citadel Advisors initiated a new position, purchasing 84,102 shares.
- Israel Englander's fund Millennium Management increased its position by 948% in the quarter and now owns 380,477 shares.
High risk, high-reward play
Many hedge funds are targeting returns over the next 12 to 18 months, so their purchases do not necessarily mean they are bullish long term. But they might have seen something on a technical chart that gives the stock good momentum, or there could be near-term catalysts like more funding flowing into the sector. That happened recently when JPMorgan Chase, the country's largest bank, announced billions of equity and venture capital investments into sectors that relate to national economic security, specifically citing quantum as a sub-area.
D-Wave now has a $10.8 billion market cap and only reported about $3.1 million in revenue in Q2 and a loss of over $167 million.That means an investment in the stock is a bet on the commercialization of quantum computers. If it works, shareholders will do well. If it doesn't, the stock could sell off significantly.
That's why I'm only recommending a smaller, more speculative position at this time.
