"AI" is all the hype now. "Quantum" might be even bigger.
Let's look at four different ways to invest in companies working on a technology that's extremely promising – but also extremely early.
We know how digital computers have profoundly impacted our lives. A recent study found that the internet economy now contributed 12% to the US GDP, and it grew 7 times faster than the total US economy since 2016.
AI is expected to bump that even higher:
But this might pale compared to what quantum computers could bring.
Quantum computers represent the next technological revolution – and we’re now in the early stages of it.
So why are quantum computers so important?
The journey of computing has had three stages:
First came analog computers – as far as thousands of years ago. These were used to simulate the motions of the sun and moon, like the famous Antikythera mechanism found in an Ancient Greek shipwreck:
Eventually, a need arose for calculating more “everyday” things, such as longitude, latitude, areas, basic arithmetic, and even interest rates.
The most popular of these was the slide rule:
Next came the digital revolution, accelerated during World War II. This era was characterized by transistors operating on binary code at the speed of electricity.
These are the kind of computers we use now, although they might not look recognizable in pictures taken a few decades ago:
The next step: quantum computers.
Quantum computers operate on the principles of quantum mechanics. Their power comes from the unique behavior of elementary particles, which can exist in multiple states simultaneously due to a phenomenon called superposition.
While our current digital computers measure their capacity in bits – 0s and 1s, quantum computers measure it in qubits: all possible states between zero and one.
This is a bit hard to explain, but you can imagine that they compute across infinite parallel universes.
This allows quantum computers to outperform digital ones by millions of times more – and even solve problems literally impossible for digital computers.
For us investors, this means that quantum computing can change entire fields. Here’s a great video explanation from famous physicist Michio Kaku:
In any case, quantum computers are at the very beginning of their existence, so we won’t get to play with them in our daily lives soon.
This is what an experimental quantum computer looks like now:
Not really something that you can fit in your bag and take to the office – but neither were the first digital computers in the 1960s.
However, technology is rapidly advancing, and experts are optimistic that we will soon see a functioning quantum computer in all its glory, perhaps this very decade.
And while most consumers won’t get near one in the near future, you can expect it to change how big corporations and governments operate soon enough.
How to invest in quantum computing
Google, Amazon, Microsoft, and other tech giants are already leading when it comes to quantum research.
They and others are pursuing this technology by partnering with research labs, universities, and even startups.
Unlike the startups of the early computer and internet age, though – which could launch and grow “from a garage” – startups working on quantum need substantial funding requirements for developing quantum computers:
So it’s probably reasonable to expect that many of these startups will end up acquired by “Big Tech”.
For now, let’s look at the ways you can invest in quantum computing along an example – and see which ones make the most sense:
Directly in quantum computing “pure plays”: D-Wave Systems
“Pure play” means investing in a business that focuses only on a specific niche: in this case, quantum computers.
A typical example of a quantum pure play is D-Wave Systems – the first company to offer quantum computers commercially.
D-Wave isn’t the only quantum pure play in town: other companies, like Rigetti Computing and IonQ, are also racing to build quantum computers.
Now why did we chose to highlight D-wave?
Rigetti and IonQ both have higher market cap and higher revenue….
…and even spend more on research (including per employee):
However, D-Wave has made significant strides in developing a better chip – one their own research shows about 100,000 better at specific applications than Rigetti, for example.
It also has more customers, 67 in 2022 and on track to double that this year.
These customers are mostly pilot programs, though – revenue is barely in the single digit US$ millions.
At the end of the day, it’s difficult (if not impossible) to say which pure play will “win”. All of these companies are loss-making and in need of further funding to stay afloat.
Again, we suspect D-Wave or a competitor – or all of them – might eventually be acquired the same way DeepMind, an early “AI pure play” was acquired by Google in 2014.
Of course, Google and other Big Tech companies are already working on their own quantum computers, so this isn’t a done deal.
Indirectly: ComStock Mining for their GenMat stake
Second-degree investing is like “thrifting” for private companies.
You invest second degree to indirectly gain exposure to a private company in which the publicly traded company has invested.
For an example, we’ll look at investing in Comstock – because they own a big piece of a private quantum company called GenMat.
Comstock Mining is a gold and silver mining company from Nevada. They’ve also developed a venture arm that invests in AI to enhance the efficiency of mineral exploration – hence investing in GenMat, a quantum computing company in which ComStack has accumulated a 50% stake.
GenMat utilizes a mix of quantum and classical algorithms to optimize material design. Combined with their generative AI called ZENO, these libraries can simulate both known and new materials, including critical properties like electrical and thermal conductivity, heat capacity, and more. GenMat plans to offer ZENO to enterprise clients later this year.
All of this seems excellent on the surface.
However, there’s been a trend for large and established companies to invest in new startups just to get a second chance to feel “hot and sexy” again.
And just like many middle-age crises, these partnerships don’t always end well:
A survey by McKinsey & Company found that only 10% of startups rated their partnership with a corporation a “success”.
Another study discovered that only 14% of established companies investing in startups had consistently implemented the necessary steps to create some sort of value from these partnerships.
Also, over 70% of corporate venture capital (CVC) activity was found to be sporadic or opportunistic, leading generally to poor return on investment.
I guess age is NOT just a number for corporate relationships. 😬
This is only one of the downsides of the “second-degree investing” strategy.
The other one is that it’s almost impossible to tell what GenMat’s impact will be on Comstock’s business as a whole, and on their stock price:
GenMat is still a startup. It hasn’t generated substantial revenue yet.
Even when that happens, it is still unclear how this technology will impact the mining industry. It could take several years for the impact to be felt by Comstock Mining.
The stock market is forward-looking. This means equity investors generally discount the future, “bringing it into the present”. So, any rumor even of GenMat's success would positively impact Comstock's price directly – perhaps more than warranted, leading to a "disillusionment" crash? That’s also called “buy the rumor, sell the news” strategy.
Of course, another way to invest indirectly in quantum computers could be to simply buy shares in Big Tech companies that are developing their own quantum technology:
IBM: building a quantum computing network where developers can already deploy quantum apps running on IBM’s own quantum computers
Microsoft: doing something similar with its Azure Quantum cloud
Google: recently completed a 70-qubits quantum computer
and others.
Should you invest in these instead?
Probably not for the quantum factor alone – these are extremely large companies with plenty of revenue streams and any gain from quantum will take a while to show up in the income statement.
In “shovel sellers”: FormFactor
Another strategy is to invest in “shovel sellers” instead of “gold miners”.
Example of investing in shovel sellers:
the 2017 and 2021 crypto bubbles: as many cryptos were mined on Nvidia graphics cards, a profitable trade was to simply buy Nvidia
the 2022-2023 AI craze: again, Nvidia would have been a great “shovel seller” to invest in, as most AI companies train and run their AI models on Nvidia graphics cards.
Which brings us to FormFactor.
Your desktop computer likely uses a fan to get cold enough to work. Quantum processors must be very cold – about a hundredth a degree above absolute zero — to avoid “decoherence”.
This is where FormFactor's ADR cryostat line comes in: it offers affordable and fast access to extremely low temperature cryostats for companies building the actual quantum computers.
The main risk here is that, once quantum hype really takes off, shovel sellers like FormFactor might either:
not grow as fast as the rest of the industry: for example, most computers use Taiwan Semiconductor Company (TSMC) chips – but pure plays like Apple have seen a much faster stock price growth
grow too much too fast: for example, Nvidia, which has seen almost a vertical price chart and who some believe is extremely overvalued right now.
or be rendered obsolete by competitors or even the “shovel buyers” themselves: several companies are working on other ways to cool quantum computers already.
In the entire sector: Defiance Quantum ETF
Inventing in an ETF tracking an index can also be a cheap and simple way to “get exposure” to a technology.
There’s no quantum computing index yet, but there are a few ETFs tracking companies involved in quantum computing.
The largest is Defiance Quantum ETF, so let’s have a look at what’s inside it.
According to the Defiance Quantum ETF fact sheet, as of Sep 15, 2023, the ETF holds 71 stocks. Of these stocks, only 2 are quantum pure plays:
IonQ (NYSE: IONQ): A quantum computing company that develops and manufactures trapped ion quantum computers.
Rigetti Computing (NASDAQ: RGTI): A quantum computing company that develops and manufactures superconducting quantum computers.
These two together form only 4.9% of the entire ETF.
D-wave didn’t even make the cut on account of its lower market cap…
For reference, Accenture, a consulting firm that presumably at some point will have some “quantum software implementation” consulting contract thing, takes up 1.4% of the ETF.
So, it's not quite the “quantum ETF” you might think you’re buying – even if it does give some sort of mixed exposure to the quantum computing opportunity.
Should you even invest in quantum computing companies right now – and if yes, how?
Most pure play quantum computing companies are small and still operating as research labs. Large tech companies are making big strides towards quantum but, even so, it might take ages for any “quantum-related earnings” to show up in their income statement. There isn’t even a “proper” ETF covering the space.
Investors in quantum computers are really really early. Maybe too early.
Still, being early – if you can stomach the crazy level of risk and you pick the right company – could turn out to be a great decision.
Let’s not forget, though, that in 1999 people had the chance to invest both in Pets.com and in Amazon. Only one turned out to be a real winner.
How you choose to invest, if at all, is up to you, but here’s one way to look at it:
Basically:
do you want to place a clearer bet on quantum computing? Maybe go with a pure play, or even a second degree quantum company like IBM, Google, or NEC.
do you want less risk? Maybe choose an ETF (even if the quantum bit is really diluted) or, again, a second degree quantum company like Google etc.
and so on.
Whichever strategy you choose, remember that, despite the hurdles, quantum computers offer real and tremendous benefits.
They could help with food supply, like finding ways to make fertilizer from nitrogen. They might also contribute to energy solutions, such as developing fusion power. In medicine, quantum computers could model diseases at the molecular level, tackling conditions like Alzheimer's, Parkinson's, and cancer that regular computers struggle with.
They might even be able to help us understand complex scientific theories and find new laws of nature.
Maybe that alone is worth a piece of our portfolios, no?