As we point out in a similar article from May, analyzing the quantum-computing equity market based on an ETF exposed to it is a bit tricky. Very few companies have core business related to quantum computing and most companies in these ETFs have peripheral Quantum computing projects but are big and high-performing in other industries that are core to their business, so an ETF's performance wouldn't be saying much about the quantum computing industry.
Therefore, we'll delve a little deeper to see what actual challenges there are in the industry and whether they can be practically solved for the delivery of a return on investment as far as scalable practical use cases go.
Solving Quantum computing is akin to a Herculean labor. It's hard to argue with the laws of physics, and when it comes to Quantum computing, a major problem yet to be overcome is Decoherence-induced errors. Decoherence is the enabler of transition from Quantum physics to the everyday physics we experience. Qubits (the quantum equivalent of bits) can only remain in a superposition as long as there's no interaction with the environment.
Even the slightest interaction causes them to decohere to classical bits, introducing computing errors. The hard part is to keep them in a superposition long enough for quantum computation to be viable. Further, to scale quantum computing, you have to add more qubits to the system, but adding more qubits, in principle, increases the probability of error. Finally, any approaches to error correction must obey the Quantum no-cloning theorem, which makes these approaches inherently more challenging than their classical counterparts.
In 2022, Azure Quantum demonstrated the soundness of physics required to build topological qubits (these qubits are different in that they can maintain coherence for longer and would thereby lead to a reduced error rate through more stability).
On the other hand, Researchers at Quantum AI, an arm of another big tech company, made a breakthrough in 2023, demonstrating a reduced error rate even with an increased number of traditional Qubits. However, rare correlated error events that happened roughly every hour limited the exceptionally low error rate required for practical quantum computing, with more research required to tackle them.
Despite these steps, the challenges remain to be effectively overcome. It's anyone's guess how long it'll take for quantum computers to scale and become economically viable. If the amount of capital being invested by venture capital firms in the industry is any guide, it certainly doesn't look good for the industry as of recent.
According to IQM's State-of-Quantum Report of 2024, the venture capital invested in Quantum startups dropped by 50% worldwide in 2023 compared to the year prior, with the US quantum startup ecosystem seeing the greatest decline of capital at 80%.
As far as public equity in the quantum computing industry goes, it is overall yet to be profitable. The industry hasn't experienced any operating leverage in any meaningful sense and is focused on growing revenue in its early stage. The hard problems with regards to practicality and scalability has resulted in many quantum computing stocks trade at price levels that make them non-compliant with stock exchanges, resulting in delisting threats by stock exchanges.
Also read why Jim Cramer can't recommend a particular quantum computing stock here.
For our list, we've selected companies that have a presence in the quantum computing industry and ranked them on the basis of their 12-month price upside on analysts' consensus. Please note that we have used the median upside because average upsides can be greatly affected by outlier analysts on either side of the low or high.
For some stocks, both mean and median upsides were too low, but since we wanted to limit our list to pure-play stocks as much as we could, we chose them using the high end of the upside, provided that at least 9 analysts had contributed to their average upside.
Finally, we ranked the stocks on weighted scores, with median upside having a weight of 0.4 while analyst count having a weight of 0.6. For stocks for which we have used high-end of the upside, the weight for the upside is 0.2, with analyst-count weight reduced to 0.4. For stocks whose upside is based on only one analyst, and if the upside is over 30%, we assigned weights of 0.01 to both the upside and the analyst count.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
READ ALSO: 10 Best Future Stocks for the Long Term and 10 Best Affordable Stocks Under $10 to Buy.
A close up of a technician's hands manipulating a temperature control system for a thermal system.
FormFactor, Inc. (NASDAQ:FORM) is a Cali-based company that designs performance-enhancement products for chip companies, in addition to testing and measurement systems for integrated circuits. Quantum computers require temperatures approaching absolute zero to allow qubit coherence. This is the market that the company operates in when it comes to quantum computing. It provides cryogenic environment systems, with products including sub-10 mK dilution refrigerators, and sub-100 mK cryostats, among others.
Based on the forecast of 8 analysts, the 12-month median upside for FormFactor, Inc. (NASDAQ:FORM) is 37%. Bear in mind though, that FORM is not a pure-play quantum computing stock, so its risk profile is not as high. However, since it does provide significant exposure to the industry through its sales of cryogenic systems so its well-positioned to benefit from growth in the industry without exposing itself fully to the risk.
As of Q2, 2024, 29 hedge funds from among the ones tracked by Insider Monkey held positions in FORM, an increase of 9 from Q1.
Overall, FORM ranks 7th on our list of best quantum computing stocks to buy according to analysts. While we acknowledge the potential of FORM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FORM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.