Is Quantum Computing a Reason to Buy Alphabet Stock?

Shares of Google's parent company, Alphabet (GOOGL), surged nearly 6% after the announcement of their new quantum computing chip. On December 9, the company introduced the Willow quantum computing chip. According to Alphabet, this chip can solve complex problems in just five minutes, which would take traditional computers far longer—potentially even longer than the age of the universe.

While this development is exciting, it is essential for investors to consider what it means for Alphabet's stock. The impact of quantum computing on Alphabet's stock price is still uncertain, but the breakthrough may highlight the company's capability to innovate and adapt in a rapidly evolving tech landscape.

The Current State of Alphabet's Stock

Despite a year-to-date gain of over 35% in Alphabet's stock price, the company has faced challenges recently. The rise of AI tools like ChatGPT has raised concerns about the potential decline of the Google search engine's dominance. In response, Alphabet launched their generative AI product, Google Gemini. However, it remains uncertain how effective Gemini will be in retaining users who may be tempted to switch to other platforms.

Although Alphabet has expanded into other ventures like Google Cloud, the bulk of its revenue still comes from advertising tied to search results. This reliance has made its stock perform relatively poorly compared to other major companies. In fact, Alphabet's price-to-earnings (P/E) ratio is currently the lowest among the so-called "Magnificent Seven" tech stocks.

Can Quantum Computing Make a Difference?

The future of quantum computing does hold promise, although it remains ambiguous. The ability to significantly increase processing speeds is an advantage, yet practical applications are still limited. The technology may have advanced faster than there is actual need for it.

One of the biggest challenges in quantum computing is the stability of the basic units of information known as qubits. These qubits are often unstable and prone to errors. However, the Willow chip has shown a significant advancement by improving the connection between qubits, which could reduce errors as the number of qubits increases. This progress might establish Alphabet as a leader in quantum computing, provided that applications for this technology are developed.

Alphabet's Diverse Revenue Streams

Investors often overlook the fact that Alphabet has an impressive liquidity position, currently totaling $93 billion. Although this figure has decreased from $111 billion at the end of 2023 due to various investments, including dividends and technology advancements, it still provides significant resources for potential new revenue streams.

Additionally, Alphabet generated $48 billion in free cash flow during the first nine months of 2024, which will help sustain its ongoing diversification efforts. While it is true that approximately 78% of the company’s revenue came from advertising in Q3 2024, this is a slight reduction from 81% over the past three years.

Notably, Google Cloud’s contribution to total revenue has increased, moving from 8% in Q3 2021 to 13% in Q3 2024. This trend shows that Alphabet is gradually diversifying its revenue base. Should they achieve similar success with quantum computing or other innovations, they could continue to thrive, even if their search engine loses some of its relevance.

Should You Buy Alphabet Stock Because of Quantum Computing?

The potential contribution of quantum computing to Alphabet's revenue remains uncertain. Therefore, it might not be a definitive reason to invest in the company’s stock at this time.

However, the introduction of Willow could serve as an indirect reason to invest. It signifies Alphabet's ongoing ability to reinvent itself amidst competition and disruption. It is important to acknowledge that even the successful deployment of Google Gemini might not fully counteract the competitive threat posed by AI tools like ChatGPT.

Nonetheless, Alphabet’s successful ventures in Google Cloud have already begun to lessen reliance on advertising. With a significant amount of liquidity and consistent generation of free cash flow, the company is well-positioned for future growth.

In conclusion, Willow serves as a testament to Alphabet's innovative spirit and may allow the company to diversify its income. Even if quantum computing does not directly lead to substantial revenue, Alphabet's continual efforts to innovate can help maintain its status as a key player in the tech industry, regardless of changes in Google Search's popularity.

Quantum, Investing, Technology