Amid all the hype surrounding OpenAI’s ChatGPT, Alphabet (GOOG 1.85%) (GOOGL 1.79%) seems to have been brushed aside by some investors. That could turn out to be a mistake.
Alphabet’s strengths — and there are many of them — have not faded as interest in generative artificial intelligence (AI) has grown. Many factors that helped the stock return more than 350% over the past 10 years remain unchanged.
But there are other things investors should consider when evaluating Alphabet. Here’s arguably the most overlooked reason to buy and hold this seedy tech stock.
The next big thing in computing
Could a new technology be on the way that will have an even bigger impact than chatbots? Yes. One thing in particular you should have on your radar: quantum computing. To understand quantum computing, we must first delve a little into quantum physics. But no worry; it won’t be too painful.
Quantum physics studies subatomic particles. Some of them are probably at least a little familiar to you, such as protons, neutrons, and electrons. However, there are also more exotic subatomic particles – quarks, leptons, and bosons – that you may not have heard much about.
In terms of quantum computing, there are two crucial things to know about these subatomic particles. First, they can exist in multiple states at the same time. Observing a subatomic particle forces it into only one state. Second, two particles can be connected even if they are far apart. This is called quantum entanglement.
Current computers use bits (0 or 1). Quantum computing uses quantum bits, or qubits, to take advantage of particles’ ability to exist in multiple states. Because qubits can be entangled, quantum computers can perform computations in parallel. The combination of these factors means that quantum computers can perform massive calculations in seconds that would take even the fastest supercomputers available today many years to solve.
AI stands out as one of the most important applications of quantum computing. The ultra-fast processing capabilities of quantum computers could drastically reduce the time required to train AI systems. Quantum AI could also be much more powerful than AI apps running on traditional computers. Potential quantum AI applications include natural language processing, self-driving cars, drug development and weather forecasting.
Alphabet’s quantum proofs
There are several leading companies in quantum computing. Alphabet is definitely at the top of the list. The company’s Google unit has developed several frameworks and libraries for software development to manage and use quantum computing. But Google has made even bigger strides.
In 2019, Google announced that it had achieved quantum supremacy. The term refers to a quantum computer’s ability to solve a problem that a classical computer could not (at least not in a practical timeframe). The company said its quantum computer performed a calculation in three minutes and 20 seconds that would have taken the most powerful supercomputers thousands of years to solve.
IBM scientists disputed Google’s claim, arguing that adding enough disk space would allow a supercomputer to solve the problem in 2.5 days. Even if the IBM team is right, Google has achieved an important milestone for quantum computing.
Less than two weeks ago, Google announced another major achievement. The company said it had successfully shown for the first time that errors could be reduced by increasing the number of qubits used in processing.
Why is this a big deal? Qubits are super sensitive. Sundar Pichai, CEO of Alphabet and Google, wrote in a blog that “even flare can cause miscalculations.” But the promise that increasing the number of qubits used can significantly reduce these errors could overcome a major hurdle for quantum computing.
Global consulting firm McKinsey & Company predicts that the quantum computing market could be worth between $300 billion and $700 billion. To put those numbers in perspective, Alphabet generated total revenue of $257.6 billion last year. Quantum computing represents a tremendous new market opportunity for the company, potentially larger than any of its current businesses.
That opportunity might not be as far away as you might think. Many executives anticipate that within the next seven years, quantum computing will begin to revolutionize the industry.
Don’t overlook the obvious
Maybe Alphabet won’t be a big winner in quantum computing. But I wouldn’t take that bet. My prediction is that it will likely be among at least the top two or three most successful quantum computing companies in the next decade. Quantum computing really might be the most overlooked reason to buy and hold Alphabet stock.
But investors shouldn’t overlook the obvious reasons to invest in Alphabet. The company remains highly profitable. It’s got a boatload of cash. Several of its products dominate their respective markets. The stock also looks like a steal based on its historical valuations. In my view, Alphabet seems like a stock to buy, even without the big opportunity in quantum computing.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keith Speights has positions at Alphabet. The Motley Fool has positions in Alphabet and recommends Alphabet. The Motley Fool has a disclosure policy.