Wall Street is hot on quantum computing stocks, but Google's quantum chip actually lacks computational power

Google announced its new "quantum chip" Willow on Tuesday. According to Google, this chip "can exponentially reduce errors as the number of qubits increases," and its performance far exceeds that of its predecessor launched in 2019, marking a significant breakthrough in the field of quantum computing. This news has driven a significant surge in Google and related stocks this week, but analysts warn that quantum computing still has a long way to go before any commercial applications, urging investors not to get overly excited by the recent gains.

Wall Street Hypes Quantum Computing

Shares of Google's parent company Alphabet rose 4% on Wednesday, following nearly a 6% increase the previous trading day, marking a 13% rise over the past five days.

Other quantum computing-related stocks, including the lesser-known competitor Rigetti Computing, surged 45% on Tuesday and reached a new high on Wednesday, with the stock up over 659% this year. Additionally, some standout stocks in the Defiance Quantum ETF, including MicroStrategy and D-Wave Quantum, have risen 538% and 355% respectively this year.

Moreover, stocks of Nvidia, Coherent, IonQ, and RadNet have all more than doubled this year.

Analysts believe that while quantum computing is not a new phenomenon, its importance is increasing as more data is used to train large language models. Quantum computing utilizes qubits, which are far more complex than the binary bits used in current computing, enabling it to perform complex calculations that existing technologies cannot achieve. This technology could eventually be used for drug development at the molecular level, generating highly accurate weather forecasts days in advance, and even breaking existing data encryption protocols.

At the same time, investors are eager to seize the next iteration opportunity in generative artificial intelligence. Since the AI boom sparked by ChatGPT two years ago, investors have been searching for the next batch of stocks that can benefit from this technological evolution.

Eric Jackson of EMJ Capital referred to quantum computing as "the next major theme" on social platform X, stating that he has invested in Rigetti Computing, believing the company has "tremendous opportunities."

Google's Quantum Chip Still Cannot Achieve True Quantum Computing

However, as Google clearly stated in its announcement, quantum computing still has a long way to go before any commercial applications.

Hartmut Neven, head of Google Quantum AI, wrote in a blog post on Monday: "The next challenge in the field is to demonstrate a 'practical super-classical' computation on existing quantum chips that is meaningful for real-world applications." Alphabet CEO Sundar Pichai stated on social media platform X that Willow is "an important step in our journey to build a practical quantum computer with real-world applications in drug discovery, fusion energy, battery design, and more."

Therefore, the 12% increase in Alphabet's stock this week is questionable. Additionally, the surge in quantum computing stocks this week may also be attributed to the attention from Tesla CEO Elon Musk, who responded with "Wow" to a post about Google's quantum chip, potentially sparking a surge in investor interest; according to Vanda Research, the trading volume of call options for Alphabet reached its second-highest level of the year on Tuesday.

Google is also in urgent need of any positive news. Analysts believe that Google is currently facing multiple challenges, including concerns about its competitive position in the generative AI space and worries about the U.S. government potentially breaking up the company, casting a shadow over Alphabet's stock. Prior to this week, Alphabet's stock performance lagged behind most of its tech giant peers as well as the annual performance of the S&P 500 and Nasdaq indices.

Currently, Alphabet is the only tech giant with a price-to-earnings ratio below 20 times. In contrast, competitor Meta Platforms had a price-to-earnings ratio of around 25 times earlier this week, while Apple, Microsoft, Amazon, and Nvidia all had price-to-earnings ratios exceeding 30 times.

Analysts: Google is Leading, But Don't Be Too Optimistic About Quantum Computing

While quantum computing may not solve the problems Google is facing, analysts say this news does remind people that the company still possesses considerable strength in technological innovation. BofA Securities' Justin Post wrote, "The advancements of the Willow chip indicate Alphabet's leading position at the forefront of technological innovation, which is crucial for market sentiment."

Colin Sebastian of Robert W. Baird added, "Although quantum computing is still years away from widespread commercial application, the newly launched Willow quantum chip showcases Google's leadership in the field of quantum research."

However, Paul Meeks of Harvest Portfolio Management also cautioned investors not to get overly excited by the recent surge, pointing out that practical applications in this field may still take years to materialize. He suggested that investors looking to enter this field should consider investing in large tech companies with other core businesses. He noted that this situation is similar to late 2022, when stocks of companies like Nvidia and C3.ai were pushed up. But over time, some early leaders in this field will gradually emerge.

"There’s no problem investing in Alphabet, as its existing strong business still provides upside potential for the company, but for those pure quantum computing companies, if their stock prices are pushed too high, they may become targets for short selling."

"I need to see actual application cases, as well as application cases that can achieve profitability. I like technological advancements, but based solely on these types of announcements, I won't assign any of these companies excessive valuation premiums."