Is Quantum Computing a Reason to Buy Alphabet Stock?

Shares of Alphabet, the parent company of Google, experienced a significant boost, shooting up nearly 6% following the announcement of its new quantum computing chip. On December 9, the company unveiled the Willow chip, claiming that it has the capability to resolve problems in five minutes that would take a traditional computer longer than the age of the universe.

However, the key question for investors revolves around what this technological breakthrough means for Alphabet's stock in the long run. While the immediate impact of quantum computing on Alphabet's stock is not fully defined, the development could enhance investor confidence in the company's potential for transformation.

The State of Alphabet's Stock

Although Alphabet's stock has increased over 35% this year, the company has confronted challenges in recent years. The emergence of AI technologies, particularly with products like ChatGPT, has sparked concerns about the future relevance of Google's search engine.

In response, Alphabet introduced its generative AI product, Google Gemini. Despite this, the effectiveness of Gemini in preventing a potential decline in Google Search users remains uncertain.

Additionally, Alphabet has expanded its business into areas like Google Cloud. Nonetheless, search-related advertising accounts for the majority of its revenue. This has resulted in Alphabet's stock slightly lagging behind other large-cap stocks, leading to a relatively low P/E ratio of 25, the lowest among the so-called "Magnificent Seven" tech companies.

Can Quantum Computing Help?

The prospects of quantum computing appear promising but are still uncertain. The potential to significantly enhance computational speed is exciting; however, practical applications of this technology have yet to emerge, suggesting that its development may have outpaced actual demand.

One challenge is the instability and error-prone nature of qubits, the fundamental components of quantum computing. Fortunately, the Willow chip has made progress by effectively linking qubits, which could lead to fewer errors as the number increases. This innovation positions Alphabet to be a leader in quantum computing, provided that useful applications are discovered.

Alphabet's Diversification

Investors may overlook the fact that Alphabet has a substantial liquidity reserve of $93 billion, down from $111 billion at the end of 2023 as the company invests in dividends, AI, and quantum computing technologies.

This significant liquidity offers Alphabet the capacity to explore new revenue sources. The $48 billion in free cash flow generated in the first three quarters of 2024 positions the company well for continued diversification.

While Alphabet has gradually diversified, the fact that 78% of its revenue in Q3 2024 came from advertising may be disheartening, albeit down from 81% over the previous three years. Nevertheless, during this time, Google Cloud's proportion of revenue increased from 8% in Q3 2021 to 13% in the latest quarter. This shows that Alphabet is making progress in diversifying its income stream, suggesting potential growth even if reliance on Google Search diminishes.

Will Quantum Computing Make Alphabet Stock a Buy?

Ultimately, it remains to be seen how much quantum computing will contribute to Alphabet's revenue. Therefore, it may not serve as a direct reason for investors to purchase the stock at this time.

Instead, the spotlight may be on how the introduction of Willow indicates Alphabet's capability to reinvent itself. There is a possibility that emerging technologies like ChatGPT could threaten Google Search, and while the debut of Google Gemini may help, its effectiveness is questionable.

What is noteworthy is Alphabet's progress with Google Cloud, which has already started to lessen its dependence on advertising revenue. Coupled with its notable liquidity and ability to generate significant free cash flow annually, the release of Willow illustrates how Alphabet can potentially diversify its revenue avenues.

Even if quantum computing does not become a main revenue contributor, its development may solidify Alphabet's stature as a serious player in the tech industry, regardless of changes to Google Search’s popularity.

Quantum, Computing, Alphabet