Quantum computing may be the next sector to see share prices surge like artificial intelligence stocks. Pure-play quantum computing company IonQ (IONQ -3.09%) is an example. Its shares skyrocketed 270% over the past 12 months through the week ending January 24.
Along with IonQ, another quantum computer stock to consider is Google parent Alphabet (GOOGL -3.06%) (GOOG -2.98%). The conglomerate added quantum computing to its tech bets back in 2006, and possesses the deep financial pockets to see it succeed.
Which company, Alphabet or IonQ, presents a better long-term investment opportunity in the nascent quantum computing sector? This analysis examines both companies to arrive at an answer.
A look at IonQ's technology
Success in the quantum computing field depends on how effectively a technology can harness the subatomic particles used in making calculations. IonQ solves some of the main challenges with quantum computers today.
For starters, IonQ's tech can operate at room temperature. Typically, quantum computers require temperatures colder than deep space to minimize calculation errors.
Error rates are another challenge with quantum machines. Calculations must be checked and errors corrected for the tech to produce useful results, making quantum systems difficult to scale.
IonQ's technology delivers 99.9% accuracy. Moreover, last year, the firm unveiled a new process to correct errors that is up to thousands of times more efficient than competitors.
It's also building a quantum computer network by connecting quantum machines together, a feat that is the first of its kind according to the company.
IonQ's tech led to acquiring prominent customers, such as AstraZeneca, to help the pharmaceutical giant develop new medicines. The U.S. Air Force, Hyundai Motors, and Airbus are also among IonQ's clientele.
Its customer acquisitions enabled the company to reach $12.4 million in third quarter sales, a 102% year-over-year increase. IonQ expects to wrap up 2024 with full year revenue of at least $38.5 million, which would be a 75% jump up from 2023's $22 million.
The case for Alphabet
Alphabet is probably best known for its Google search engine and digital advertising businesses, and these cash cows supply the funds to invest in quantum computing. To give a sense for how much financial firepower it can bring to bear, Alphabet generated free cash flow (FCF) of $17.6 billion in Q3. FCF indicates the money available for a company to invest in its business, reduce debt, pay dividends, and repurchase shares.
In December, Alphabet released its new quantum chip, Willow. This chip completed a calculation in five minutes that would take the world's most powerful supercomputers 10 septillion years to complete, which is longer than the age of the universe.
Willow also possesses the ability to reduce errors as it scales up. This is impressive since errors usually increase with scale. Willow can do this because it can correct computational mistakes in real time.
Currently, Willow is in the prototype phase, so it isn't available for commercial use. However, when Alphabet is ready to provide widespread access to its quantum machines, it's well positioned to do so.
That's because the firm also operates Google Cloud, a successful cloud computing business. This division grew Q3 revenue by 35% year over year to $11.4 billion. Alphabet already deployed its quantum computing services to a handful of pilot customers through Google Cloud. Currently, IonQ must pay Alphabet and other cloud vendors to do the same.
Deciding between IonQ and Alphabet stocks
IonQ has a head start on Alphabet in terms of commercial use of its quantum computers, since Alphabet is limiting access. That doesn't mean IonQ's lead is secure.
Alphabet has billions of dollars at its disposal, while IonQ is currently not profitable, posting a net loss of $52.5 million in Q3. For reference, Alphabet exited Q3 with net income of $26.3 billion.
However, Alphabet lost an antitrust case last year regarding its Google search business. The court hasn't ruled on a punishment yet although that's expected later this year. Alphabet also has the outcome pending to another antitrust case regarding its advertising business.
What this means is that investing in Alphabet carries some risk, depending on the final impact of the antitrust cases to Google's business. That said, IonQ stock holds risk as well, because the firm's only source of revenue is its quantum computing tech.
Given the risks, which is the better quantum computing stock? The answer is Alphabet. The specter of the antitrust cases hangs over the company, but according to CEO Sundar Pichai, it could take years to resolve, since Alphabet can appeal an unfavorable ruling.
Another consideration is that it will likely be years before quantum computers are scalable enough for widespread use. Some forecasts estimate that won't happen until beyond 2040.
With potentially decades before quantum computers reach mass usage, Alphabet's financial strength comes into play here. It can afford to invest in its quantum division without needing the tech to produce revenue while IonQ's survival depends on continued sales growth.
These factors give Alphabet the edge over IonQ as the better long-term investment in the budding field of quantum computing.
