Is Quantum Computing a Reason to Buy Alphabet Stock?

Shares of Google’s parent company Alphabet (GOOGL -1.11%) (GOOG -1.16%) rose nearly 6% after the recent announcement regarding their new quantum computing chip. On December 9, the company revealed the Willow quantum computing chip, claiming it could tackle a problem in five minutes, a task that would take longer than the history of the universe on conventional computers.

While this development is intriguing, investors may find the broader implications for Alphabet’s stock even more important. The immediate effects of quantum computing on Alphabet’s stock are uncertain, but the breakthrough could provide reassurance about the company’s ability to innovate and adapt to changing technology trends. Here’s an overview of the situation.

The Current State of Alphabet's Stock

Alphabet’s stock has experienced a healthy gain of over 35% this year, although the company has faced challenges in recent years. The rise of ChatGPT has led to concerns that Google’s search engine might become outdated.

In response, Alphabet introduced its own generative AI tool, Google Gemini, shortly after. However, the effects of Gemini on maintaining Google Search’s user base remain unclear.

Additionally, while Alphabet has expanded into areas like Google Cloud, advertising related to search is still its primary revenue stream. This reliance has resulted in Alphabet's stock underperforming compared to other major tech players, leading to a P/E ratio of 25, which is the lowest among the so-called "Magnificent Seven" tech stocks.

Impacts of Quantum Computing

The future of quantum computing looks promising yet uncertain. The ability to significantly increase computing speeds is a major advantage, but practical applications are still limited, suggesting the technology may have advanced more quickly than the demand for it.

Moreover, the fundamental components of quantum computing, known as qubits, are often unstable and susceptible to errors. However, Willow has made headway by effectively linking qubits, reducing the chances of errors as more qubits are added. This progress could position Alphabet as a leader in the quantum computing space, provided that applicable uses for the technology are discovered.

Diversification of Alphabet's Revenue Streams

Investors might overlook that Alphabet boasts an impressive $93 billion in liquidity, a decrease from $111 billion at the end of 2023 as the company invests in dividends, artificial intelligence (AI), and quantum computing, among other technologies.

This liquidity is more than adequate to support the development of new revenue sources. Additionally, the $48 billion in free cash flow generated in the first three quarters of 2024 ensures ongoing investment in diversification initiatives.

Despite this, Alphabet's revenue remains heavily dependent on advertising, with 78% of total revenue in Q3 2024 coming from this area, slightly down from 81% in the last three years.

On a positive note, during this same period, the contribution from Google Cloud has increased to 13% in Q3 2024 from just 8% in the third quarter of 2021, indicating a gradual diversification of Alphabet’s revenue streams. If the company achieves similar success with quantum computing or other ventures, it can thrive even if user interest in Google Search declines.

Is Quantum Computing a Good Reason to Buy Alphabet Stock?

The ultimate impact of quantum computing on Alphabet’s revenue is still largely unknown. Hence, it may not serve as a direct reason to purchase stock in the company.

Instead, the more significant takeaway could be how Willow symbolizes Alphabet's potential for reinvention. While ChatGPT may pose a threat to Google Search, the introduction of Google Gemini might only provide limited respite.

However, Alphabet's achievements with Google Cloud have already begun to lessen its reliance on advertising. Coupled with its substantial cash reserve and consistent generation of tens of billions in free cash flow, Alphabet is well-positioned for the future.

Thus, although Willow may not serve as a major revenue driver, it illustrates Alphabet’s ability to innovate and adapt. This capability could solidify Alphabet's relevance in the tech industry, regardless of the future popularity of Google Search.

Alphabet, Stock, Investment