As 2024 comes to a close, Alphabet is finishing on a high, driven by significant progress in quantum computing that has led to a stock rally towards year-end, despite its current lack of commercial application.

The shares of Google’s parent company have surged over 30% since they hit a low point in September, with much of the increase occurring after the announcement of its quantum computer’s performance, which utilizes the Willow chip. This breakthrough in quantum technology has introduced a wave of optimism, even as concerns loom that Alphabet may be falling behind AI-focused rivals like OpenAI and facing antitrust issues. These developments have helped Alphabet reclaim its position as one of the standout performers among major tech companies, currently placing it in the top 20 stocks of the Nasdaq 100 for the year.

“Investor sentiment had turned negative as many perceived Alphabet as an established legacy company losing ground in essential industry advancements, but this leap illustrates that it still holds a competitive edge,” asserted Michael Smith, a senior portfolio manager at Allspring Global Investments. “It serves as a reminder to the market of Alphabet’s wealth of intellectual property and its pivotal role in the technology of tomorrow.”

According to the company, the algorithm utilized to assess the capabilities of its quantum computer is not yet ready for practical use and is unlikely to generate revenue in the short term. However, the long-term potential is seen as substantial, with Alphabet’s advancements also positively impacting stocks of other companies engaged in similar tech pursuits, including Quantum Computing Inc, Rigetti Computing Inc, D-Wave Quantum Inc, and IonQ Inc.

Significant investments have been made in quantum computing by governments, tech firms, and venture capitalists, recognizing its processing power as vastly superior to that of classical computing. Analysts at Bank of America have highlighted numerous prospective applications for this technology, such as drug discovery, advanced materials engineering, and next-generation encryption solutions.

“Quantum advancements could create a considerable technological edge for Alphabet,” noted Bank of America analyst Justin Post, although he acknowledged that practical applications are still likely years away. He emphasized that Alphabet’s “track record in monetizing next-generation technologies” is underappreciated in the current market context.

Alphabet’s shares are currently trading at approximately 21 times projected earnings, below the Nasdaq 100’s 27-fold ratio, and it possesses the lowest valuation multiple among the so-called Magnificent Seven stocks.

Antitrust issues have cast a shadow over the stock since an August ruling found that Google had illegally monopolized the search market. The U.S. Justice Department has proposed a mandated sale of the Chrome web browser and has sought to terminate a partnership with AI startup Anthropic—moves seen as more severe than expected. The eventual outcomes remain uncertain, particularly as President-elect Donald Trump’s appointees for antitrust positions are anticipated to maintain a robust approach towards large tech firms.

Nonetheless, some investors believe that the current valuation sufficiently accounts for existing regulatory risks, especially in light of the company’s recent financial performance, which has highlighted strong fundamentals despite these challenges.

“We would view any volatility linked to antitrust challenges as a buying opportunity, as the firm continues to showcase vigorous growth prospects,” commented Hanna Howard, a portfolio manager at Gabelli Funds. “Alphabet remains a leader in innovation, and we should soon begin to see returns from its investments.”

Kevin Walkush, a portfolio manager at Jensen Investment Management, shares an optimistic perspective as well. He values Alphabet for its dominant position in the AI sector, viewing quantum computing as an additional avenue of opportunity.

“From a valuation standpoint, it doesn’t represent a significant shift,” Walkush remarked. “However, there is immense potential tied to quantum; although it is still far from realizing value, making its chances of success appear limited at this point.”

Tech chart of the day

Meta Platforms Inc has seen its shares skyrocket by 75% this year, pushing its market capitalization to a record $1.6 trillion, as Mark Zuckerberg has transformed the company’s image into a frontrunner in AI innovation. In parallel, Tesla Inc, under the leadership of Elon Musk, has also thrived with a staggering 93% increase year-to-date, bringing its market value to $1.5 trillion, benefitting from Musk’s strong ties with President-elect Donald Trump and robust financial results.

© 2024 Bloomberg

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