That headline might seem… odd.
It’ll all make sense in a minute.
But first…
I want to like quantum computing. I really do.
Quantum computing is a new-age technology that has the potential to totally revolutionize the entire technology sector.
Classical computers have always used binary code as their native language – 1s and 0s. Every classical computer system we use today – from playing video games to modeling the weather – relies on those 1s and 0s.
But that may be about to change.
Engineers are hoping to transform that language from a binary state to a quantum state. In essence, quantum computers do not “think” in bits. They compute using “qubits,” a type of “language” that could be 0,1, both, or many things at once.
A full explanation isn’t really essential for us. What is important are the potential implications.
For instance, in late 2024 Alphabet (Google’s parent company) announced a quantum computing breakthrough with Willow, its latest quantum computing chip.
Hartmut Neven, the founder and lead at Google Quantum AI, said that Willow performed “a standard benchmarked computation” in less than five minutes that would take today’s fastest supercomputers roughly 10 septillion years to complete…
10 septillion. That’s 10 to the 25th power, 10,000,000,000,000,000,000,000,000 years.
Frankly, that’s an incomprehensible number.
For reference, it’s estimated that the universe is 13.8 billion years old. Or, 13,800,000,000.
Google may as well say that its new quantum system can tackle equations that would take today’s best supercomputers a literal eternity to solve. Or, more simply, it can tackle problems that classical supercomputers simply can’t.
That’s beyond impressive. That level of computation should be able to make incredible differences in our world. According to Google researchers, it could even make differences in other worlds as well.
Regarding the Willow data set, Neven said, “It lends credence to the notion that quantum computation occurs in many parallel universes, in line with the idea that we live in a multiverse, a prediction first made by David Deutsch.”
The idea of a new quantum-age machine solving a problem in seconds that the world’s most advanced supercomputers couldn’t even dream about solving is intriguing.
When science fiction begins to blend with reality, a lot of wealth creation is soon to follow, right?
That certainly seems to be what many investors are thinking.
For instance, IonQ (IONQ), a popular quantum computing company, is up by more than 410% during the past year.
As exciting as that seems, we won’t be recommending IONQ, or any other quantum computing company, any time soon.
And that’s for a few reasons.
Don’t Fall for FOMO
One, because it’s impossible to predict long-term winners in this race. When the Internet first rose to prominence, the popular name of the day was America Online, AOL. Surely, AOL would dominate in the new Internet economy.
But, of course, it didn’t happen. AOL suffered after the bubble burst. And after a few failed mergers and reinventions, the business was sold to Apollo Global Management in 2021. You can still use AOL email, but it’s not really a player.
Another reason is that I just don’t understand quantum computing or quantum mechanics. Very few do. You need an advanced degree in theoretical physics to even begin to get your arms around it.
And when making investments, I stick to the Warren Buffett mantra: “Never invest in a business that you cannot understand.”
Buffett has also spoken at length about the importance of cash flows in successful investments.
He said, “Our acquisition preferences run toward businesses that generate cash, not those that consume it.”
Right now, all of the pure play quantum companies are in cash consumption mode, with no guarantees of long-term profits.
Above, I showed the incredible return with IONQ. This company has a $10 billion dollar market cap. But that valuation is being “supported” by $7.6 million in sales and a net loss of $32.3 million last quarter.
Looking at consensus analyst estimates, IonQ isn’t expected to post a profit for years (if ever). And yet, investors are piling into the name because the company’s CEO, Niccolo de Masi, recently said that he believes that his company will be the Nvidia of the quantum computing world.
That’s a big statement.
And it sparked a nearly 50% rally in IonQ shares last week. But as far as I can tell, nothing changed with the business itself.
All of the hype around quantum computing reminds me of the hoopla surrounding the early Internet companies during the dot-com boom.
The Internet revolutionized the world. And it (eventually) created trillions of dollars of new wealth.
But along the way, plenty of people lost their shirts by speculating on unprofitable dot-com stocks.
And if quantum computing stocks are like dot-coms, then it might be useful to revisit what Berkshire’s management had to say about Internet stocks from that era.
They’re Still Turds
During the Berkshire Hathaway annual shareholder meeting there are always a couple of Q&A sessions with management (notably Warren Buffett and, prior to his death, Charlie Munger).
During the 2000 annual meeting, someone asked Buffett and Munger what they thought about the rampant speculation that was occurring in the tech sector.
Buffett provided his typical nuanced, highly articulate response, highlighting the risk that comes along with speculation.
He said, “Anytime there have been real bursts of speculation in the market, it does get corrected eventually.”
He continued, “Ben Graham was right when he said that ‘in the short run it’s a voting machine, in the long run it’s a weighing machine.'”
Buffett’s response lasted two minutes and forty seconds. Then he passed the baton to his right-hand man, Munger.
And Charlie Munger always had a way with words… [emphasis added]
Well, I think the reason we use the phrase wretched excess is that there are wretched consequences. If you mix the mathematics of the chain letter or the Ponzi scheme with some legitimate development like the development of the Internet, you are mixing something which is wretched and irrational and has bad consequences with something that has very good consequences. But you know, if you mix raisins with turds, they’re still turds.
The audience erupted with laughter. Buffet tried to hold his back. And Munger, known for his wry sense of humor, didn’t crack a smile.
It’s a funny exchange. And you can watch it for yourself right here. But it also summed up the situation pretty succinctly.
Munger knew that there were potentially wonderful companies forming at the time. He didn’t doubt the impact that the Internet would have on the world. But he did doubt his ability to pick and choose eventual winners when, at the time, there were no evident frontrunners, fundamentally speaking. And the rampant speculation was souring an otherwise promising technology.
That’s about where quantum computing is right now…
Nobody in the industry has been able to scale and monetize this tech in a meaningful way. Yet.
Eventually, someone will.
One day, I’m sure there will be wonderful companies in this industry that justify their valuations with attractive fundamentals.
But that day is not now.
And until that changes, I’m happy to sit on the sidelines. I hope our readers are, too.
Regards,
Nick Ward
Analyst, Wide Moat Research
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