Alphabet’s Stock Mojo Is Back With Help From Quantum Tech Leap

(Bloomberg) -- Alphabet Inc. is ending 2024 on a high, with a quantum computing breakthrough spurring a late-year stock rally — despite having no near-term commercial potential.

Shares in the Google parent have jumped more than 30% from a September low, with a chunk of those gains coming after news about the capabilities of its quantum computer, which runs on its Willow chip. Quantum computing has provided a positive narrative amid worries about Alphabet falling behind AI-focused rivals like OpenAI and fears about antitrust risk, helping the stock re-establish itself as a megacap outperformer. It’s now among the top 20 Nasdaq 100 stocks this year.

“Sentiment has been poor because people were starting to view Alphabet as a legacy company on the wrong side of major advances, but this shows it hasn’t lost its mojo,” said Michael Smith, senior portfolio manager at Allspring Global Investments. “It reminds people that Alphabet is a treasure trove of IP, and a company that will be very relevant to the future of technology.”

The algorithm used to test the quantum computer’s capabilities has no practical applications, the company said, and is unlikely to be a revenue driver anytime soon. Still, the ultimate potential is seen as vast, and Alphabet’s breakthrough has sent the shares of other companies working on similar technologies soaring, including Quantum Computing Inc., Rigetti Computing Inc., D-Wave Quantum Inc. and IonQ Inc.

Governments, tech companies, and venture capitalists have poured billions of dollars into quantum computers, which have processing powers millions of times greater than that of classical computers. Bank of America analysts listed a number of potential uses for the technology, including drug discovery, advanced material design, and next-generation encryption solutions.

“Quantum innovation has the potential to create a significant tech moat for Alphabet,” even if commercial uses for it are still years away, wrote Bank of America analyst Justin Post. Alphabet’s “track record of developing next-gen technologies with successful monetization” is underappreciated in the stock’s valuation, he added.

Alphabet shares trade at around 21 times estimated earnings, below the Nasdaq 100’s multiple of 27. It also has the lowest multiple among Magnificent Seven names.

Antitrust risk had been weighing on the stock since a ruling in August that Google illegally monopolized the search market. The US Justice Department has proposed a forced sale of the Chrome web browser and sought to unwind a partnership with AI startup Anthropic — steps seen as more punitive than expected. While the ultimate fallout remains unclear, President-elect Donald Trump’s antitrust picks are expected to maintain a hardline stance against big tech.

Still, some investors say that the valuation adequately reflects regulatory risks already, especially since the company’s most recent results underlined its solid fundamentals outside of this issue.

“We would use any antitrust-related volatility as a buying opportunity since it continues to have strong growth prospects,” said Hanna Howard, a portfolio manager at Gabelli Funds. Alphabet is “constantly innovating, and we should start to see returns from the investments it has been making.”

Kevin Walkush, a portfolio manager at Jensen Investment Management, is also bullish. He likes Alphabet because it is a strong incumbent in the AI space, while quantum computing adds optionality on top.

“It is not a needle mover from a valuation standpoint,” Walkush said. Still, “there is great optionality associated with quantum, but it is so far out from driving value at the moment the probability of success should be considered low.”

Tech Chart of the Day

Shares in Meta Platforms Inc. have rallied 75% this year, propelling its market value to a record $1.6 trillion, as Mark Zuckerberg has repositioned the social media company as an AI innovator. However, Elon Musk’s Tesla Inc. is catching up, with a 93% year-to-date gain pushing its market capitalization to $1.5 trillion. The EV maker has benefited from Musk’s close ties to President-elect Donald Trump as well as better-than-expected results.