Is Quantum Computing a Reason to Buy Alphabet Stock?

Shares of Google parent Alphabet (NASDAQ: GOOGL) surged nearly 6% after the company unveiled its new quantum computing chip. On December 9, the company introduced the Willow quantum computing chip, which it claims can solve problems in five minutes that would take traditional computers longer than the age of the universe.

However, the key question for investors is whether this development will have a significant impact on Alphabet's stock. The direct effects of quantum computing on the company's finances are still uncertain, but this breakthrough might boost investors’ confidence in Alphabet's ability to innovate and adapt. Let’s explore this further.

The State of Alphabet's Stock

Alphabet has experienced a year-to-date growth of over 35% in its stock value. Despite this positive trend, the company has faced challenges in recent years, particularly with the emergence of generative AI technologies like ChatGPT, raising concerns about the future of its core product, the Google search engine.

In response, Alphabet developed its own generative AI solution, Google Gemini, but it remains uncertain how effective this will be in retaining Google Search users.

While Alphabet has expanded into various sectors, including Google Cloud, its primary source of revenue still comes from search advertising. As a result, its stock has not performed as robustly as some of its mega-cap counterparts. Currently, Alphabet's price-to-earnings (P/E) ratio stands at 25, which is lower than many of the 'Magnificent Seven' stocks.

Can Quantum Computing Help?

The prospects for quantum computing appear promising, albeit uncertain. While the technology offers the potential for greatly enhanced computing speeds, viable applications remain limited. In fact, developments in this area have outpaced the real-world needs for such advancements.

The fundamental components of quantum computing, known as qubits, are often unstable and prone to errors. However, Willow has made strides in connecting these qubits, potentially reducing errors as more qubits are added. If applications for quantum computing are discovered, this progress could position Alphabet as a leader in this innovative field.

Alphabet's Diversification

It's important to recognize that Alphabet has substantial liquidity, currently sitting at $93 billion. This figure has decreased from $111 billion at the end of 2023, as the company invests in dividends, artificial intelligence, and technologies like quantum computing.

This liquidity provides Alphabet with ample resources to develop new revenue streams. Additionally, the company reported generating $48 billion in free cash flow in the first nine months of 2024, ensuring it can continue its diversifying strategies.

While 78% of Alphabet's revenue in the third quarter of 2024 still came from advertising, down from 81% over the past three years, it shows that the company is gradually becoming less dependent on this source. Google Cloud, for example, has increased its share of revenue to 13% in Q3 2024, up from 8% in the same quarter in 2021. This trend indicates Alphabet's ability to diversify its income. Thus, if it achieves success in quantum computing or other ventures, it could remain profitable even if users shift away from Google Search.

Will Quantum Computing Make Alphabet Stock a Buy?

At this point, the actual contribution of quantum computing to Alphabet's overall revenue is still uncertain. Therefore, it may not serve as a definitive reason for investors to buy the stock right away.

Instead, it might be more relevant to consider how Willow illustrates Alphabet's potential to reinvent itself. Although technologies like ChatGPT could challenge Google Search’s dominance, Alphabet’s success in other sectors, like Google Cloud, has already begun to lessen its reliance on advertising revenue.

With a solid cash position and continuous generation of significant free cash flow, the emergence of Willow symbolizes Alphabet's commitment to diversifying its business. Even if quantum computing does not become a primary revenue stream, the company's ongoing efforts could establish it as a key player in the tech landscape, irrespective of the popularity of Google Search.

Stocks, Investing, Innovation