Robert Fagan Associate Director
04th March, 2025
The financial press frequently highlights the performance of technology stocks and emerging trends. For example, over the past two years, excitement and hype surrounding breakthroughs in artificial intelligence (AI) have dominated the news. Leading technology stocks have driven stock market performance in indices like the S&P 500. However, market narratives can shift rapidly, as seen in mid-January when a low-cost Chinese AI model from DeepSeek emerged. This reasoning model, named R1, matched the performance of leading Western models like those from OpenAI, but at a claimed fraction of the cost, a detail which some analyst’s dispute. The announcement caused a market stir, leading to a decline in shares of major AI tech stocks.
With DeepSeek taking some of the sizzle out of the AI story, investors are eager to find the next trend in technology. In this article, we will explore the world of quantum computing, a technology that has been touted as a potential next big breakthrough.
It's understandable if the term "quantum computing" hasn't crossed your path before. Until recently, discussions about quantum computing were mostly confined to academic circles and science fiction. However, in mid-December a significant breakthrough by Google's research teams brought quantum computing into the spotlight. This announcement not only captured the attention of the scientific community but also made headlines in mainstream news outlets like the BBC and piqued public interest in the topic.
In a bid to keep pace with their prominent tech rival, both Microsoft and Amazon made headlines in February with their own quantum breakthroughs. These achievements have fuelled further anticipation that the dawn of large scale quantum computers might be just around the corner.
Figure 1: Google search activity for the term ‘Quantum computing’
Source: Google
Here, we explore the implications of this breakthrough for the investing community and consider whether a quantum revolution is imminent. We'll delve into how recent advancements in quantum computing, such as Google's latest achievements, could impact various industries and what this means for investors. Is the hype surrounding quantum computing justified, and how should investors position themselves considering these developments? Let's find out.
In classical computing, the fundamental unit of information is called a bit. Bits operate in a binary fashion, meaning each bit is either a 1 or a 0 at any given moment, a concept readers will likely have heard of before. The increasing power of classical computers over time has been achieved by packing more transistors into chips, enabling them to perform billions of separate binary calculations per second.
A quantum computer essentially tries to take a traditional computer and blend it with quantum mechanics to create a new type of machine. In contrast to a traditional computer like a PC, the basic unit of information in a quantum computer is known as a qubit, or ‘quantum bit’. Qubits differ significantly from classical bits due to a unique property called ‘superposition’. This means that a qubit can exist in multiple states at once, representing both 1 and 0 simultaneously, a strange property relating to the esoteric workings of quantum mechanics. This ability allows quantum computers to process a vast amount of information more efficiently than classical computers.
Additionally, qubits exhibit a trait known as entanglement, another quantum phenomenon where the state of one qubit is directly related to the state of another, no matter the distance between them. This entanglement allows for incredibly fast information transfer and complex problem-solving capabilities. Quantum computers leverage these properties to perform calculations that would take classical computers an impractically long time to complete, opening new possibilities in fields such as cryptography, material science, and artificial intelligence.
However, quantum computers are extremely delicate devices that face significant stability challenges, making it difficult for scientists to produce reliable results. Unlike classical computer bits, which are highly stable and easily managed and manipulated by programmers, qubits in a quantum system are known for their volatility. This volatility stems from several factors, including environmental sensitivity. Even tiny changes in temperature or electromagnetic fields can disrupt the quantum state of qubits, throwing quantum computers completely off course.
Another prominent issue faced by researchers is the high error rates in quantum systems. Instability in a quantum system can cause it to produce faulty outputs, rendering it less useful as a computer. Researchers have been actively working on developing error correction techniques and more robust quantum hardware for decades, to address these challenges and improve the reliability of quantum computers.
Quantum computing made headlines in December with an exciting announcement from Google's dedicated research team. The company unveiled a new quantum computer chip, named ‘Willow’, which performed a calculation in just five minutes—a task that would have taken one of the world's fastest supercomputers ten septillion years, or ten followed by 25 zeros, to complete. This breakthrough not only showcased the immense computational power of quantum technology but also highlighted a notable advancement in reliability.
Google's system demonstrated that by grouping larger numbers of qubits into so-called ‘logical qubits’, the overall stability of the quantum computer improved. This result, previously unobserved in prior research, has given the scientific community renewed hope. As the technology scales, the increased stability suggests that quantum computing could become a practical and commercially viable tool in the future. Some see the development as a pivotal moment in the journey towards harnessing the full potential of quantum computing.
Google's lead project researcher, Hartmut Neven, even suggested the breakthrough might indicate the existence of parallel universes, given that a classical computer would take longer than the lifespan of the known universe to complete the same calculation. Neven's remarks echo earlier theories about alternate universes proposed by quantum researchers dating back to the 1950s. However, more cautious analysts of Google's work argue that, while solving the problem, known as ‘Random Circuit Sampling’ in quantum jargon, is indeed impressive, it is certainly an exaggeration to make claims about other dimensions.
In a field where major breakthroughs are uncommon, the academic and technology communities were taken aback in February by Microsoft's pioneering achievement, especially coming so soon after Google's. Diverging from Google's approach, Microsoft unveiled their own chip, Majorana 1, after two decades of dedicated research. This remarkable development is the first to utilize particles known as Majorana Fermions, to create a new state of matter known as a 'topological state.' This fourth state of matter, distinct from solids, liquids, and gases, was long thought to be purely theoretical.
Microsoft's high-risk theoretical approach seems to have been justified, with the company asserting that their method will scale more easily than competing techniques. They believe it offers the best strategy to address the stability issues inherent in quantum systems and a clearer direction to building large scale functional systems in future. The lead project researcher proudly announced that this development has shifted the timeline for utility-scale quantum computers from decades to just a few years in the future.
In an astonishing turn of events, just one week after Microsoft's announcement, Amazon unveiled their own quantum chip named Ocelot. This chip employs what Amazon refers to as "Cat qubits," inspired by the Schrödinger's cat thought experiment proposed by physicist Erwin Schrödinger in 1935. Amazon's researchers are confident that their hardware approach will significantly reduce quantum errors, thereby greatly enhancing utility. They believe their error correction method will achieve similar performance to competing technologies but with much smaller systems, making it easier to scale up to highly functional quantum computers.
Amazon Web Services (AWS), the cloud computing division of Amazon, is the world's largest provider of Infrastructure-as-a-Service (IaaS). The company aspires to integrate quantum computing into its cloud services in the future. Additionally, Amazon is optimistic that quantum simulations could significantly enhance their extensive logistical operations, which are crucial to their core e-commerce business.
Proponents of quantum technology emphasise its potential applications in various fields, including drug discovery in the pharmaceutical industry, simulations, and optimisations in logistics. For example, in drug discovery, a quantum computer could theoretically simulate molecular interactions on a scale far beyond current capabilities, potentially leading to the development of numerous new medicines. In the realm of simulations and optimisations, quantum computers can handle complex computations that are currently infeasible for classical computers. This includes optimising supply chains, traffic flow, and financial portfolios. Quantum optimisation algorithms can solve problems with a vast number of variables more efficiently, leading to better decision-making and resource management.
However, many analysts caution about the potential risks associated with quantum technology, particularly in cryptography or code breaking. They fear that a quantum-capable computer could break any password on an encrypted device, posing significant risks to the data security of both individuals and businesses. Quantum computers could potentially decrypt sensitive information protected by current cryptographic methods within seconds. This has led to the development of quantum-resistant algorithms and the exploration of hybrid cryptographic systems to ensure data security in a post-quantum world, should it arise.
In summary, while quantum technology holds immense promise for advancing various fields, it also presents significant challenges, particularly in maintaining data security. The ongoing development of quantum-resistant cryptographic methods is crucial to mitigate these risks and fully harness the potential of quantum computing safely.
In addition to Google, Amazon and Microsoft, several other prominent companies are actively engaged in quantum computing research. These include major technology firms like IBM and Microsoft, as well as industrial giant Honeywell, which has been exploring this technology for over a decade. Alongside these established players, there are smaller more specialised, or pure-play quantum companies, such as IonQ and D-Wave Quantum.
Investors interested in the quantum computing sector should proceed with caution. Smaller, more speculative quantum stocks have shown significant volatility following Google's announcement and subsequent developments. For instance, shares of D-Wave Quantum plummeted by as much as 40% in a single day in early January after Nvidia CEO Jensen Huang remarked at the annual Consumer Electronics Show that it could take another 15 to 30 years for quantum computers to become truly useful. These smaller quantum names are not yet profitable companies and are fraught with risk.
Figure 2: Pure-play quantum stock return since January 1st, 2025
Source: Factset/Davy
The meaningful commercial application of quantum computing still requires overcoming numerous significant milestones. Google's recent achievement with its Willow quantum chip is better viewed as a step towards viability rather than a truly groundbreaking step. While impressive, it highlights the ongoing challenges in the field. Moreover, scaling quantum computers to the level necessary for solving large, complex problems remains a daunting challenge. Building quantum computers with millions of qubits that can operate reliably in tandem is still far beyond our current capabilities. Addressing these challenges is crucial for the future commercialisation of quantum computing.
According to the US Defence Advanced Research Projects Agency (DARPA), it is unlikely that a meaningfully useful quantum computer will be developed before 2033 at the earliest. There remains a significant amount of both research and capital investment required to continue advancing the technology. The eventual winners in the quantum computing race are far from certain, as what the economics of a commercial quantum system would look like is still unclear.
Indeed, the technology may never make the leap from an interesting, expensive academic pursuit to a fully-fledged business product in the way that AI did with ChatGPT. The path to commercialisation involves overcoming numerous technical challenges, securing substantial funding, and demonstrating clear, practical applications that justify the investment. While quantum technology is undoubtedly fascinating, the current uncertainties regarding its timeline and commercial viability make it a challenging investment prospect. As a result, we favour investing in established technology companies with diversified operations, rather than narrow niche stocks.
Quantum computing and its potential future applications are very exciting and hold the promise of transformative change for certain industries and businesses. Yet today, the technology still appears many years away from reaching commercial usefulness. Our Davy investment team avoids taking highly speculative bets on companies lacking strong fundamental investment criteria. Specifically, within the technology sector, we have preference for companies with proven track records, generating tangible earnings growth with proven technologies. For example, in portfolios we hold established technology leaders such as Google, Microsoft and SAP. These companies display an attractive mix of strong balance sheets, high returns on invested capital, sustainable earnings growth and leadership positions within their respective categories.
As of early February 2025, the technology sector has lagged the broader market, a stark contrast to its previous years of dominance. This underperformance is likely due to concerns over the significant investments required for AI infrastructure and a resurgence in corporate earnings in non-tech industries. The relative underperformance of the technology sector in 2025 highlights the importance of maintaining a diversified investment strategy. Our philosophy is to always seek to invest in high-quality companies and assets whose value can reasonably be ascertained.
Warning: The information in this article is not a recommendation or investment research. It does not take into account the investment objectives, knowledge and experience, or financial situation of any particular person and is not an invitation to invest. Davy manages discretionary portfolios in accordance with agreed investment mandates and Advisory clients receive investment advice specific to their circumstances directly from their advisers.
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