Why IBM Stock Is a Sensible Way to Gain Exposure to Quantum Computing
1 hour ago
Looking for a smart, sensible way to gain exposure to the tantalizing upside of quantum computing without getting burned? You may be surprised to hear that an old-school tech stock like IBM (IBM) fits the bill, but Big Blue has you covered. Indeed, I’m bullish on shares of IBM due to its experience in quantum computing technology, reasonable valuation, and history as a strong dividend stock. These factors combine to make it a sensible way for investors to gain exposure to the tantalizing upside offered by quantum computing.
Quantum computing stocks are all the rage these days, with many previously obscure small-cap quantum stocks multiplying many times in value. This surge in interest comes after Alphabet (GOOGL) released impressive news about its quantum chip, Willow. I previously wrote about the potential of the quantum space at the beginning of 2024, and while I was bullish on the theme early on, the stocks have surged to levels I couldn’t have even imagined at the time.
For example, previously unheralded Rigetti Computing (RGTI) has gained over 500% in just the past month alone, while IonQ (IONQ), arguably the largest and most well-known of the pure-play quantum cohort, has tacked 50% onto its value over the same time period.
While these stocks are indeed exciting, they are extremely volatile, and many are years away from reaching profitability if they ever do so, making them risky propositions for many investors. The good news for readers looking for exposure to this exciting space is that there is also a less risky way to gain exposure to the upside of the technology with a company that has been around for over 100 years and is not only profitable but trades for a reasonable valuation and pays an attractive valuation — IBM.
Before diving deeper, let’s take a moment to review what quantum computing is and why the market is excited about it. Quantum computing uses quantum mechanics to perform calculations exponentially faster and more efficiently than today’s most powerful supercomputers. According to Defiance ETFs, the sponsor of the Defiance Quantum ETF (QTUM), a thematic quantum computing ETF, quantum computers “process information in a radically different manner and therefore have the potential to explore big data in ways that have not been possible until now.”
For example, Alphabet’s Willow chip made waves when Alphabet announced it took just five minutes to solve a complex math equation that would have taken a ‘normal’ supercomputer 10 septillion years to solve. While there is some debate about Alphabet’s claims among physicists and mathematicians, and Alphabet itself was quick to point out that quantum computers are yet to outperform typical computers in commercially relevant applications, the development highlights the power of quantum computing and illustrates why it has captured the attention of investors.
While not all use cases of quantum technology are clear, its power to harness immense amounts of big data offers significant potential in fields like healthcare and defense. The breakthroughs in quantum computing are indeed exciting and certainly worthy of some of the hype, but it’s important to remember that we are still many years away from it becoming a widespread, commercially viable technology, as we’ll discuss below.
Because IBM is often thought of as an old-school tech stock, some investors may be surprised to hear that it is at the cutting edge of the quantum revolution. IBM already offers customers access to “high-performance” quantum computers featuring quantum processing units (QPUs) with 100+ qubits.
In fact, IBM charges customers a whopping $96 a minute to utilize these QPUs. The company also offers its Qiskit software suite to support these services. IBM has been working on quantum computing since the 1990s, so it has a lot of experience in the space that is just catching significant attention from the market now.
While many of the popular pure-play, small-cap quantum stocks are likely years away from profitability, that isn’t the case with IBM. The stock trades for a reasonable valuation of 22 times earnings, representing a slight discount to the broader market, as the S&P 500 currently trades for 24.5 times earnings. This isn’t necessarily a huge discount to the broader market, but IBM is downright cheap compared to many of the popular quantum-related stocks.
Because many of these stocks don’t yet produce earnings, it’s useful to compare them on a price-to-sales basis. By this measure, IBM trades at a reasonable valuation of just 3.5 times revenue. Meanwhile, Rigetti Computing trades at an astronomical level of 392 times sales, which is simply an unsustainable level. Meanwhile, IonQ trades at a similarly elevated valuation of 250 times sales, while D-Wave Quantum (QBTS) also trades for over 250 times sales.
All of these companies are losing money today, and their valuations are eye-watering. On the other hand, IBM gives investors a much cheaper way to take a bite at the quantum apple with considerably less risk. Plus, if quantum fails to take hold or the technology fails to develop or commercialize, IBM has plenty of other business segments to fall back on, like its cloud business, whereas this cohort of quantum pure-plays do not.
While the aforementioned small-cap quantum stocks are likely years away from paying a dividend (if they ever pay one at all), IBM has a long and proud history as a strong dividend stock. The company has paid dividends to its shareholders for an impressive 35 years in a row, and it has grown its dividend payout for the past 25 years in a row, making it a newly minted Dividend Aristocrat.
While IBM’s dividend yield has come down a bit based on the stock’s strong performance over the past year, it still yields an attractive 3.0%. This 3.0% dividend yield is significantly higher than that offered by the S&P 500, which currently yields 1.3%.
Turning to Wall Street, IBM earns a Moderate Buy consensus rating based on five Buys, seven Holds, and one Sell rating assigned in the past three months. Furthermore, the average IBM stock price target of $230.92 per share implies 3.65% upside potential from current levels.
While IBM may not be as glamorous as some of the shiny new names in the quantum space, it offers investors a sensible way to gain exposure to this exciting long-term trend with less risk. Unlike the small-cap quantum plays discussed above, IBM is profitable, trades at a reasonable valuation, and has a diversified business model to fall back on if quantum computing fails to develop as a commercially viable technology. Plus, IBM is a consistent dividend payer with an attractive 3.0% yield.
If news about quantum computing fades from the headlines, the massive rallies in stocks like Rigetti Computing may fizzle out. This could cause these stocks to give back most of the recent gains, but IBM should be able to keep ticking along. I’m bullish on IBM for these reasons and believe this makes it a sensible choice for conservative investors who want to manage their risk while still gaining exposure to the exciting long-term promise of quantum computing.
