Microsoft's Major Quantum Breakthrough: Is the Stock a Buy?

Innovation is flowing from major technology companies. From hand-controlled augmented reality glasses at Meta Platforms, to self-driving car developments at Alphabet, and robot-controlled warehouses at Amazon, these companies are continually enhancing their technological edge, creating opportunities for future growth.

Microsoft (MSFT) has recently made a notable breakthrough with its quantum computing chip known as Majorana 1. This innovation brings the world closer to the commercialization of quantum technology, significantly enhancing the field of materials science and potentially transforming the cloud computing landscape.

But does this mean that Microsoft stock is a good investment today?

The Future of Cloud Computing

To simplify, Microsoft’s Majorana 1 quantum chip addresses a critical limitation seen in traditional quantum computing approaches, which often result in unstable systems suitable only for controlled research settings. Microsoft has developed a new material called a topoconductor, which may resolve these stability issues and allow for scaling quantum chips effectively. This advancement could pave the way for quantum computing to become more accessible.

Similar to how transistors revolutionized conventional computers, this breakthrough from Microsoft could significantly impact the quantum computer market. The excitement surrounding this technology lies in the immense capabilities of quantum computers. Even a few quantum bits (qubits) can solve intricate problems much faster than traditional computers, making it possible to reduce computing expenses notably in areas like cloud computing, and fostering growth in artificial intelligence (AI) and autonomous vehicles.

A Technological Achievement Not Ready for Market

One of the main obstacles to implementing advanced digital technologies globally is the high cost of computing. New AI applications necessitate substantial investment in data centers, which is essential for everything from cloud computing to video streaming and modern smartphones. Microsoft anticipates spending around $80 billion on AI-related capital expenditures by 2025, and it is just one of several companies pouring money into this area. Across the technology sector, trillions are expected to be invested in data centers in the coming years, especially with the inclusion of China.

This is why quantum computers hold great potential— they could make computing more cost-effective. Developers might provide advanced AI tools to a broader audience, address complex biotechnology issues, and tackle simulations much faster than current technology allows. It’s an exciting prospect for sure.

However, it is crucial to manage expectations regarding the commercialization of quantum computers. The Majorana 1 chip is still a prototype and not yet ready for mass production. Although Microsoft believes it has accelerated the timeline for quantum computing adoption, it may still take years, if not decades, for this technology to be market-ready. In the near term, Microsoft’s focus on AI capital expenditures is more critical for driving growth in its business.

Should You Buy Microsoft Stock?

Despite the recent announcement and the growing interest in AI, Microsoft shares are currently down about 15%, marking one of their most substantial declines in a decade. This drop may stem from CEO Satya Nadella’s warning about an impending surplus of AI data centers, mentioned during the unveiling of the Majorana 1 chip.

Following this dip, Microsoft's stock now carries a trailing price-to-earnings ratio (P/E) of 32, slightly above the S&P 500 average of 30. However, this could be perceived as a "cheap" valuation for such a major tech player. With a year-on-year revenue growth of 12% and an even faster growth in operating income, which rose 17% last quarter, Microsoft shows promise. The potential revenue from its cloud computing division driven by AI could keep this growth trend alive. If this continues, Microsoft’s P/E ratio might decrease significantly in the upcoming years.

If you have a positive outlook on Microsoft’s future, now might be an appropriate time to consider purchasing the stock.

Microsoft, Quantum, Cloud