Profiting From Quantum Computing Is An Art, Not A Science

Profiting From Quantum Computing Is An Art, Not A Science
Reda Farran, CFA

over 2 years ago6 mins

  • The market for quantum computing is projected to hit $65 billion by 2030, representing a compounded annual growth rate of 56% over the decade.

  • You can profit from that growth by investing in the startups or Big Tech firms building quantum computers, or by investing in firms that manufacture the components.

  • Alternatively, you could invest in sectors set to benefit from the advent of quantum computing, like Big Data, biotech, and cybersecurity.

The market for quantum computing is projected to hit $65 billion by 2030, representing a compounded annual growth rate of 56% over the decade.

You can profit from that growth by investing in the startups or Big Tech firms building quantum computers, or by investing in firms that manufacture the components.

Alternatively, you could invest in sectors set to benefit from the advent of quantum computing, like Big Data, biotech, and cybersecurity.

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Governments and tech firms all over the world are racing to develop quantum computers, in a bid to shake up medicine, artificial intelligence, and dozens of other sectors. No surprises, then, that the market is projected to hit $65 billion by 2030 – a compounded annual growth rate of 56%. But with so few pure-play quantum computing stocks out there, you’ll need to get creative if you want to profit from the market’s massive growth…

What exactly is quantum computing?

The nitty-gritty details of how quantum computers work are beyond the scope of this Insight – we’re investors rather than physicists, after all – but here’s a pretty good overview to satisfy your curiosity. The most important takeaway is that quantum computers are fast. Extremely fast. They have the ability to process massive amounts of data in fractions of a second, letting us do things that we couldn’t even have dreamed of without them – things that even the best supercomputers today just aren’t capable of.

Now, it’s important to note that big technical challenges need to be addressed before the technology becomes a reality. But if these obstacles are overcome, quantum computing will have a far-reaching impact on any number of different sectors. That’s why it’s important for investors to be patient and to separate reality from hype. As Bill Gates once famously said: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

With that in mind, let’s look at some of the long-term ways you can gain exposure to the booming quantum computing market.

Pure-play quantum computing firms

Publicly traded stocks of pure-play quantum computing firms are hard to come by. There’s only one at the moment: Quantum Computing Inc., a small firm that hasn’t posted any sales yet, making its stock a high-risk opportunity. Quantum Computing offers cloud-based, ready-to-run software that doesn’t require quantum expertise or training to use – an approach that opens the doors for more businesses to leverage the new technology. It's also partnering with hardware companies like D-Wave to address real-world problems, from logistics optimization to drug discovery.

Speaking of which, D-Wave is actually the world’s first commercial supplier of quantum computers, and its systems are being used by Volkswagen, Lockheed Martin, the Universities Space Research Association, and more. You can’t buy shares in D-Wave directly, but you can indirectly through the publicly listed investment fund 180 Degree Capital – although with D-Wave making just 1% of the fund’s total assets, the startup’s value has to rise significantly for it to move the needle. And since investing in 180 Degree Capital gives you exposure to all its other investments, you’re subject to how they turn out too.

Last but not least, IonQ – a small quantum computing firm that has partnerships with Microsoft, Amazon, and Google – is in the process of merging with a special purpose acquisition company (SPAC) called dMY Technology Group III in a $2 billion deal. Again, this is a small company without much by way of sales, making it a high-risk investment opportunity.

Big Tech

US Big Tech firms like IBM, Microsoft, Amazon, and Alphabet – as well as those in China like Baidu and Alibaba – are all investing heavily in a race to build reliable quantum computers. Microsoft's Azure cloud has released quantum tools, as have Google’s and Amazon's respective cloud platforms.

But of the bunch, IBM is arguably the current leader in quantum computing. The firm was one of the pioneers in the field and already has 28 quantum computers deployed – the largest fleet of devices designed for commercial and scientific use. What’s more, the company’s stock is currently the cheapest of the lot: it trades at a forward P/E that’s two-thirds lower than the average of Microsoft’s, Amazon’s, and Alphabet’s stocks.

Components manufacturers

No matter which firm wins the race toward quantum supremacy, they’re all going to be plowing loads of money into the physical hardware necessary to make this a reality.

So another route into quantum computing is to invest in the “picks and shovels”. The manufacturers of photonic systems, dilution refrigerators, and vacuum technology are likely to see increased demand over the next decade as larger, more sophisticated quantum computers are built. Honeywell, Oxford Instruments, and Keysight Technologies are among the companies that specialize in quantum computer components.

Big Data firms

The advent of quantum computing will speed up the machine-learning algorithms that analyze both existing and new data sets, which will increase that data’s value in the long term. The shift will benefit companies already adept at managing data, along with the firms that supply them with data-gathering hardware: think Splunk, Palantir, Analog Devices, Elastic, and Alteryx. A more cost-efficient way to access all these stocks is via the Defiance Quantum Computing & Machine Learning ETF.

Biotech companies

Quantum computers have the potential to model chemical processes with unprecedented accuracy, yielding new discoveries in pharmaceuticals and biotech.

According to consulting firm McKinsey, almost one-third of all life sciences companies globally have started evaluating quantum methods for drug discovery. One high-profile example is US biotech multinational Biogen, which has partnered with quantum computing specialist 1Qbit to develop a molecule comparison tool. Biogen says that gives it a competitive advantage in the early stages of drug discovery, improving accuracy and cutting costs in what is a notoriously error-prone and expensive process.

While you could invest in individual biotech stocks like Biogen, they come with company-specific risks related to the outcomes of the drugs they’re developing. So a safer and potentially more profitable approach – especially considering the whole sector is set to benefit – is to invest in the entire sector via ETFs: two of the biggest are the iShares Biotechnology ETF and the SPDR S&P Biotech ETF.

Cybersecurity firms

Many of the sectors above aren’t set to properly reap the benefits of quantum computing until the technology becomes a more practical reality. But cybersecurity firms are already benefiting from the theme.

See, quantum computers can be used to easily hack even the most heavily encrypted data. Aware of this, malicious groups are trying to hack and stockpile vast amounts of encrypted data now so that they can decrypt it later when they have a quantum computer. And rumor has it they’re not the only ones: intelligence agencies across the world are apparently doing it too. That means governments and private organizations need to start securing their systems against quantum computers long before they become widely available, massively increasing the demand for cybersecurity services today.

On top of that, cybersecurity firms are working on developing quantum-enabled defenses that can withstand an assault from a quantum computer – defenses that governments and corporations will pay an arm and a leg for when quantum computing finally goes mainstream. In fact, according to investment bank Berenberg, the quantum cybersecurity market will be worth $32.5 billion by 2028.

Estimated growth of the quantum cybersecurity market. Note: QKD = Quantum key distribution, QSC = quantum-safe cryptography, PQC = post-quantum cryptography, HSM = hardware security module. Source: Berenberg
Estimated growth of the quantum cybersecurity market. Note: QKD = Quantum key distribution, QSC = quantum-safe cryptography, PQC = post-quantum cryptography, HSM = hardware security module. Source: Berenberg

Feel free to do your research on and invest in individual cybersecurity stocks, but again, the simpler approach might be to invest via ETFs like the ETFMG Prime Cyber Security ETF and the First Trust Nasdaq Cybersecurity ETF.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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