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

Innovation continues to surge through the big tech companies, setting the stage for revolutionary changes in technology and business operations. With hand-controlled augmented reality glasses at Meta Platforms, self-driving car advancements at Alphabet, and robot-operated warehouses at Amazon, these businesses are solidifying their technological leadership, paving the way for future growth.

Microsoft (MSFT 1.14%) has recently made a significant announcement with its development of a groundbreaking quantum computing chip known as Majorana 1. This innovation is a considerable step towards making quantum computing more accessible and could potentially transform the cloud computing landscape.

So, does this make Microsoft stock a worthwhile investment?

The Future of Cloud Computing

Without delving too deep into the technical aspects, let’s outline what Microsoft’s Majorana 1 quantum chip is about. Traditionally, building quantum computers has led to highly unstable systems, which limited their use to research environments. However, Microsoft has introduced a new material called a topoconductor, which is expected to address these stability issues. This advancement could enable the scaling of quantum chips to larger sizes while maintaining their operational stability, suggesting a future where quantum computing could become more mainstream.

This breakthrough is akin to the impact of transistors in traditional computers, which could catalyze significant growth in the quantum computing sector. The excitement stems from the immense power a large-scale quantum computer could offer. Even with a limited number of quantum bits (qubits), these machines can tackle complex calculations that would take conventional computers years to complete. This capability could drastically lower computing costs, particularly in the cloud computing space, thus fostering further development in areas such as artificial intelligence (AI) and autonomous vehicles.

A Technological Wonder Not Yet Ready for Commercial Sales

One of the key challenges facing the rollout of advanced digital tools globally is the high cost of computing. New AI applications demand extensive investments in data centers to function effectively, in addition to requirements for traditional cloud computing, video streaming, and advanced smartphones. Microsoft is expected to invest around $80 billion in capital expenditures related to AI by 2025 alone, underscoring its commitment to this field. This trend will likely see trillions of dollars spent on data centers throughout the technology sector in the coming years, especially considering growth in markets like China.

This is where quantum computing could prove invaluable—by making computations more cost-effective. With quantum technology, developers can introduce sophisticated AI solutions to billions of users, tackle complex biotechnology challenges, and work on simulations that traditional computers struggle with. There is much to be excited about.

However, it’s essential to temper expectations regarding the timeline for commercial quantum computers. Currently, the Majorana 1 chip is still in the prototype stage and is not ready for market launch. While Microsoft is optimistic about accelerating the adoption of quantum technology, it may still take years or even decades before this tech matures for widespread use. In the near term, the impact of Microsoft's heavy investments in AI may be more significant for its financial performance.

Should You Buy Microsoft Stock?

In light of this recent development and the buzz surrounding AI, Microsoft’s stock is currently experiencing a 15% decline, marking one of its worst downturns in the past decade. This drop may be attributed to CEO Satya Nadella's comments about an impending oversupply of AI data centers, made during the same announcement of the Majorana 1 chip.

As it stands, Microsoft stock is trading at a trailing price-to-earnings (P/E) ratio of 32, slightly above the S&P 500 average of 30. However, this might still be considered a reasonable price for a technology leader, especially with Microsoft’s revenue increasing at a rate of 12% year-over-year. Its operating income has been rising even faster, at a rate of 17% year-over-year in the last quarter. This growth trajectory seems set to continue, particularly as the company positions itself to capture significant revenue within the AI-driven cloud division. If this trend continues, Microsoft’s P/E ratio could decline substantially over the next few years.

If you believe in Microsoft's long-term prospects, this could be an opportune moment to invest in its stock.

Microsoft, Quantum, Stock