Amazon Joins the Quantum Computing Revolution

Amazon has recently joined its "Magnificent Seven" counterparts like Nvidia, Microsoft, and Alphabet in the exciting field of quantum computing.

As we near the end of 2024, quantum computing—a new segment of artificial intelligence (AI)—is capturing the attention of investors. Overnight, companies such as IonQ, D-Wave Quantum, and Rigetti Computing have become notable leaders in this growing sector.

However, savvy investors recognize that a company’s rising popularity does not automatically mean it is a worthy investment. While the mentioned companies have seen significant increases in their stock prices, much of the interest is driven by momentum rather than solid fundamentals. Therefore, those interested in investing in quantum computing should consider established members of the "Magnificent Seven" like Nvidia or Alphabet.

Recently, my top pick among the Magnificent Seven, Amazon (AMZN 0.06%), announced some noteworthy developments regarding its quantum computing initiatives. Let's discuss how Amazon is stepping into the quantum revolution and what this means for its future AI goals.

Amazon's Role in Quantum Computing

Traditional computing, which we currently use, is based on binary code or bits (0s and 1s). In contrast, quantum computing utilizes quantum bits, or qubits, which can exist in multiple states simultaneously. This principle, known as superposition, allows quantum computers to process complex algorithms more quickly than conventional computers.

Despite these advantages, scientists at Amazon note several challenges. Factors like vibrations, heat, and electromagnetic interference can disrupt qubits, leading to errors in computation.

This phenomenon, known as decoherence, results in high error rates among qubits—an issue Amazon is actively addressing. The company has developed a new quantum chip named Ocelot, which incorporates error correction directly into its design. This unique approach means fewer qubits are needed for effective error correction, enhancing computational efficiency and potentially giving Amazon an edge in creating a scalable quantum platform.

The Long-Term Benefits of Quantum Computing for Amazon

In recent years, Amazon has invested billions in building a robust AI infrastructure. Key investments include $8 billion in Anthropic and the development of custom silicon solutions like Trainium and Inferentia chips.

These rising capital expenditures have begun to pay off, with Amazon experiencing significant growth in its cloud infrastructure segment, Amazon Web Services (AWS). This growth, combined with increasing profit margins, affords Amazon the financial flexibility to further invest in AI and quantum computing technologies.

Although competitors like Microsoft and Alphabet continue to pose challenges, Amazon's innovative approach with Ocelot might facilitate quicker customer acquisition. This positions quantum computing as an exciting opportunity within AWS, one that could drive future revenue and profit growth.

Should You Buy Amazon Stock Now?

A month ago, Amazon's stock experienced an 11% decline. Much of this may stem from broader economic concerns, including inflation and potential new tariffs from Washington, along with some perceived risk regarding Amazon's financial strategies.

The company's management has signaled a projected capex spending of over $100 billion this year, which may spook some investors. However, a significant portion of this spending targets AWS, a business showing robust growth.

Despite this downturn, investors appear hesitant to embrace Amazon's ambitious growth strategy. Currently, Amazon's stock trades at a price-to-free cash flow (P/FCF) ratio of 69, significantly lower than its five-year average of 104. This discrepancy seems ironic considering Amazon's profitability and size have substantially improved.

As AI technologies increasingly integrate into Amazon's operations, the company’s exploration of quantum computing highlights its commitment to creating a diversified AI platform. This strategic move is likely to prove beneficial in the long run. Thus, Amazon's stock appears to be a valuable opportunity for investors with a long-term perspective.

Amazon, Quantum, Stock, Investment, AI