Amazon Joins the Quantum Computing Revolution

Amazon has officially entered the world of quantum computing, aligning itself with its "Magnificent Seven" peers such as Nvidia, Microsoft, and Alphabet. This marks an important step in the development of quantum technology.

As we look toward the end of 2024, interest in quantum computing is on the rise within investment circles. Companies like IonQ, D-Wave Quantum, and Rigetti Computing have all become standout names in the push towards quantum advancement.

However, savvy investors know that just because a company gains popularity, it doesn’t automatically mean it’s a good investment. While the aforementioned companies have seen significant stock increases, much of this activity is driven by trends rather than solid fundamentals. My view is that if you're considering an investment in quantum computing, the smartest choices will likely revolve around established players like Nvidia or Alphabet.

Recently, my top pick from the Magnificent Seven, Amazon (AMZN 0.06%), disclosed a key development related to its quantum computing initiatives. Let’s delve into Amazon's role in this growing field and evaluate how it can enhance the company’s AI ambitions over time.

Amazon's Contribution to Quantum Computing

Traditional computing, the type we currently use, operates on a binary system of bits, represented as 0s and 1s. In contrast, quantum computing employs qubits (quantum bits) which can hold multiple states simultaneously due to a property known as superposition. This unique operation allows quantum computers to potentially execute complex calculations much faster than classical computers.

However, Amazon’s scientists highlight a challenge: environmental issues such as vibrations, temperature changes, and even interference from everyday devices like cellphones and Wi-Fi can disrupt these qubits, causing computational errors.

This phenomenon, referred to as decoherence, tends to increase qubit errors, and Amazon is actively working to address this issue. Their new quantum chip, named Ocelot, includes an integrated error correction feature. This innovative design means that fewer qubits are necessary to manage errors, leading to greater efficiency and cost-effectiveness in computational processes, a potential competitive advantage as Amazon aims to build a scalable quantum platform.

Long-term Benefits of Quantum Computing for Amazon

In recent years, Amazon has committed billions to its AI infrastructure. Significant investments include $8 billion in Anthropic, along with the development of proprietary silicon solutions known as Trainium and Inferentia chips.

Amazingly, these escalating capital expenditures (capex) are starting to show results. The company is experiencing swift growth in its cloud division, Amazon Web Services (AWS), and increasing profits. This combination of growing revenue and expanding profit margins grants Amazon the flexibility to intensify investments in AI, which now encompasses quantum computing.

Although Amazon will face stiff competition from Microsoft and Alphabet, its unique strategy with Ocelot in terms of scalability could facilitate faster customer acquisition. Therefore, I view quantum computing as an exciting new venture for AWS, potentially leading to significant revenue and profit increases in the future.

Is Amazon Stock Worth Buying Now?

Recently, Amazon's stock has decreased by about 11%. This decline might be attributed to broader economic concerns about inflation and potential new tariffs, along with some specific worries about Amazon itself.

The company's management has projected over $100 billion in capex spending for the current year, leading some investors to hesitate due to the magnitude of that figure. However, as mentioned earlier, most of this spending is directed at AWS, a segment that is accelerating both top-line and bottom-line growth.

Despite this encouraging outlook, investors don't seem to be fully embracing Amazon's aggressive growth strategy. Currently, Amazon’s stock is valued at a price-to-free cash flow (P/FCF) ratio of 69, which is significantly lower than its five-year average of 104. This disparity is notable, especially considering Amazon has turned into a larger and more profitable business than in the past. Additionally, as AI continues to integrate into Amazon’s ecosystem, growth levels are expected to rise further.

Amazon's venture into quantum computing highlights the company’s dedication to creating a diversified AI platform, which I believe will pay off in the long run. For long-term investors, Amazon stock looks like a bargain at this moment.

John Mackey, former CEO of Whole Foods Market, which is an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is also a board member. Adam Spatacco holds positions in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia.

Amazon, Quantum, Computing