Shares of the Google parent company Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) soared nearly 6% after the company announced the release of a quantum computer chip. On Monday, December 9, the company made its Willow quantum computer chip public, claiming it could solve a problem in five minutes that would take more time than the history of the universe on a traditional computer.
What may be more important for investors, however, are the implications for the stock. While the direct effects of quantum computing on Alphabet’s stock are unclear, the breakthrough could reassure investors about the Google parent company’s ability to transform the business. Here’s how.
Despite a gain of more than 35% for the year for Alphabet shares, the company appeared to be struggling in recent years. The rise of ChatGPT has led to fears that the company’s Google search engine is becoming outdated.
Alphabet responded a short time later with its own generative AI product, Google Gemini. Still, it remains unclear what Gemini will do to counter a potential loss of Google Search users.
Additionally, while Alphabet has diversified into other businesses, such as Google Cloud, search-related advertising revenue is the company’s largest source of revenue. This has led to the stock’s relative underperformance compared to other mega-cap stocks. As a result, Alphabet’s price-to-earnings ratio of 25 is the lowest among the ‘Magnificent Seven’ stocks.
GOOGL PE ratio data by YCharts
However, the future of quantum computing may be bright but uncertain. While the potential to exponentially increase computer speed is positive, few practical applications have emerged, meaning the technology may have advanced faster than it should have.
Furthermore, the basic building blocks of quantum computing technology, known as qubits, are notoriously unstable and error-prone. Fortunately, Willow has made a breakthrough with its ability to string qubits together, meaning fewer errors will occur as the number of qubits increases. That could bode well for the technology and make Alphabet a leader in quantum computing, assuming users find applications for the technology.
Moreover, investors often forget that Alphabet has a whopping $93 billion in liquidity. That’s down from $111 billion at the end of 2023, as the company invests in dividend payouts, artificial intelligence (AI) and other technologies such as quantum computing.
Nevertheless, this represents more than enough liquidity to stimulate new revenue streams. In addition, the $48 billion in free cash flow generated in the first nine months of 2024 will help fund further diversification.
Alphabet has diversified its revenue base, albeit slowly. Admittedly, the fact that 78% of the company’s revenue came from advertising in the third quarter of 2024 may seem daunting, especially since this is only down from 81% in the past three years.
Still, Google Cloud’s share has risen in that time to 13% in Q3 2024, compared to 8% in the same quarter of 2021, showing that Alphabet’s revenue streams continue to diversify. So if it achieves similar success with quantum computing or some other application, it can still flourish even if users lose interest in Google Search.
How much quantum computing will ultimately contribute to Alphabet’s revenues is currently unknown. So it is probably not a direct reason to buy shares in the Google parent company.
Instead, the focus should probably be on how Willow could become an indirect reason to buy Alphabet, namely its ability to reinvent itself. Indeed, it’s possible that ChatGPT could make Google Search obsolete, and the release of Google Gemini could only make a limited contribution.
However, Alphabet’s success with Google Cloud has already reduced its dependence on advertising. Moreover, it has a staggering amount of liquidity and continues to generate tens of billions of dollars in free cash flow.
So Willow potentially shows what Alphabet can do to diversify its revenue base. Even if it doesn’t end up being a major revenue generator, Alphabet’s efforts could help make Alphabet an influential presence in the tech world regardless of Google Search’s popularity.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Is quantum computing a reason to buy Alphabet shares? was originally published by The Motley Fool
