For the past three years, investing in artificial intelligence (AI) stocks was reserved almost exclusively for companies designing semiconductors or developing next-generation software.
Over the last year, however, a new pocket of the AI landscape has become increasingly popular. Investors are now complementing their core AI positions with quantum computing stocks. As is the case with any new trend, there are a number of opportunities in the quantum AI market -- some more established than others.
Below, I'll break down why Nvidia (NVDA 2.13%) could be the smartest quantum computing stock to buy right now and detail how the chip giant's approach to this emerging technology differs from the competition.
Image source: Nvidia.
Who are the major players in quantum computing?
The quantum computing market can be split into two categories. On one side are such pure plays as IonQ, Rigetti Computing, and D-Wave Quantum. In addition, cloud hyperscalers like Microsoft, Alphabet, and Amazon have also made investments in quantum computing.
For the most part, the pure plays have garnered limited business traction so far. One reason for that is quantum computing is still an exploratory technology with little in the way of commercial applications.
In addition, all three pure-plays are investing heavily into research and development. They're trying to prove that their trapped ion and quantum superconducting approaches will actually yield a technological breakthrough that leads to widespread adoption at the enterprise level. Until this happens, companies like IonQ, Rigetti, and D-Wave will likely continue burning cash.
In big tech, Alphabet, Amazon, and Microsoft are each designing their own custom quantum computing chips. While such an approach could lead to additional products and services that can be integrated into their broader cloud infrastructures, none of these companies uses quantum AI within their respective ecosystems yet.
NASDAQ: NVDA
Key Data Points
How is Nvidia involved with quantum computing?
In order to appreciate Nvidia's role in the quantum computing realm, it's important to first understand how this technology actually works.
In classical computing, developers write code in a series of binary bits -- 0's and 1's. In quantum computing systems, these bits can exist in multiple places at the same time through a property known as superposition. For this reason, the underlying code in quantum architecture is written in qubits (quantum bits) as opposed to a binary structure.
While quantum computers can theoretically process complex simulations at much faster speeds compared to traditional computing systems, qubits themselves are quite fragile and prone to errors.
This is where Nvidia enters the equation. Nvidia sells a full stack of hardware and software tools that can be paired with quantum supercomputers. For instance, the company's GPUs, CPUs, CUDA-Q software platform, and NVQLink interconnect all serve as the infrastructure backbone for a hybrid quantum-classical computing environment.
Nvidia isn't trying to build its own computer or design the best quantum chip. Instead, Nvidia's approach is more agnostic. It's seeking to integrate with different types of quantum systems, all while leveraging its core AI infrastructure stack along with newer quantum-oriented product lines as well.
This playbook is quite savvy, as Nvidia's approach allows the company to continue selling its GPU hardware while simultaneously parlaying its existing infrastructure into a new series of quantum computing services. In essence, Nvidia is taking more of a pick-and-shovel approach to quantum computing -- using this emerging technology to remain an industry leader within the broader AI opportunity.
Image source: Getty Images.
Is Nvidia stock a buy right now?
As of this writing (Nov. 24), Nvidia's forward price-to-earnings (P/E) multiple is 23.4. To put this into perspective, the stock was trading around 34 times forward earnings this time last year. I think this level of multiple compression tells a lot about how the market views Nvidia right now. Just three years ago, the company was seen as the ultimate darling of the AI revolution.
However, with concerns about AI becoming a stock market bubble on the rise, in combination with new competition from Advanced Micro Devices and custom silicon designs from the hyperscalers, some investors may fear that Nvidia's best days are behind it.
Meanwhile, the company continues to innovate at a rapid pace -- introducing new GPU architectures as well as positioning itself for emerging opportunities across robotics, autonomous systems, telecoms, and of course, quantum computing. Each of these efforts is a calculated move to expand Nvidia's long-run total addressable market (TAM).
Against this backdrop, I think Nvidia stock is becoming too cheap to ignore. In my eyes, the market is heavily discounting the company's next wave of growth -- making Nvidia a compelling opportunity to buy and hold as sentiment eventually catches up with the underlying fundamentals of a company that continues to execute at a record pace.
