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IBM: Why This Industry Dinosaur Might Be The Next Nvidia

IBM: Why This Industry Dinosaur Might Be The Next Nvidia
CeBIT 2011

IBM’s Quantum Computing: Striving for Quantum Supremacy

International Business Machines Corporation (NYSE:IBM) is often viewed as a value stock due to its high dividend yield and lower forward P/E multiple. However, recent corporate actions by IBM’s management have transformed the company’s business segments, potentially positioning it as a growth stock.

IBM’s transition from hardware to software services, including the acquisition of Red Hat, has reshaped the company and led to revenue growth in fiscal year 2022 after a period of stagnation.

While IBM remains a hardware company in part, its focus on quantum computing is an area of significance.

Demystifying Quantum Computing: The Future of Advanced Computing

To grasp the potential rewards of IBM’s quantum computing pursuits, it’s essential to understand the fundamentals of quantum computing and its importance.

Traditional computers rely on microchips to process computations using binary digits or “bits” representing two possible values: 0 and 1. In contrast, quantum computers leverage quantum mechanical phenomena through qubits. Qubits can exist in a superposition of states, providing increased computational capabilities compared to classical bits. This distinction implies that quantum computers could potentially tackle complex tasks beyond the reach of conventional computers and push the boundaries of artificial intelligence.

The point at which a quantum computer outperforms a conventional computer is known as “quantum supremacy” or the “quantum advantage.” IBM, recognized as an industry leader in quantum computing, has already constructed over 20 quantum computers, showcasing its commitment to the field.

IBM’s Quantum Computing Roadmap for Success

To develop a commercially viable quantum computer, IBM has outlined a roadmap with milestones, providing insight into its aspirations:

Year Milestone
2019 Running quantum circuits on the IBM cloud
2020 Demonstrating and prototyping quantum algorithms and applications
2021 Accelerating quantum programs with Qiskit Runtime
2022 Introducing dynamic circuits to unlock more computational possibilities
2023 Enhancing applications with elastic computing and parallelization of Qiskit Runtime
2024 Improving accuracy of Qiskit Runtime through scalable error mitigation
2025 Scaling quantum applications with circuit knitting toolbox controlling Qiskit Runtime
Beyond 2026 Boosting accuracy and speed with error correction integration into Qiskit Runtime

Presently, IBM’s top quantum computer, the Osprey, operates with 433 qubits. By 2023, IBM plans to launch Condor, a system with 1,121 qubits, with further scaling to 10,000-100,000 qubits by 2026 and beyond. This acceleration in qubit capacity is crucial in unlocking the true potential of quantum computing.

Parallel with Nvidia: IBM’s Quest for Technological Disruption

Comparing IBM’s current aspirations to Nvidia’s journey provides valuable insight. Before dominating the artificial intelligence sector, Nvidia was founded in 1993 with the goal of entering accelerated computing and solving complex problems that general-purpose computers couldn’t handle efficiently. While Nvidia’s technology initially found applications in video games, it eventually became instrumental in AI development.

IBM aims to replicate this transformative impact with its quantum computing endeavors. Although the outcome is uncertain and the timeline extensive, success in this field would undoubtedly enhance IBM’s value.

The Potential Impact on IBM’s Valuation

Assessing IBM’s investment potential in commercially viable quantum computing requires considering its valuation relative to tech peers. With a forward P/E of approximately 15, IBM trades at a discount compared to Microsoft (approximately 29) and Alphabet (approximately 23). This discount may primarily reflect market skepticism regarding IBM’s growth prospects.

However, if IBM manages to develop a profitable quantum computer, the market is likely to assign a higher P/E ratio, translating into significantly higher earnings. This combination of increased earnings and valuation ratio would attract growth-oriented investors. Ascribing a P/E ratio of around 30 to IBM could drive the stock price above $300, far exceeding its current value of approximately $147.

The Risks of Quantum Computing

IBM’s ambitions in quantum computing and its potential as a growth stock face competition from other industry players. Google’s 70-qubit Sycamore and Microsoft’s quantum computing efforts pose significant challenges. Additionally, companies like IonQ are striving to become leaders in the field.

While IBM has an advantage with its qubit count and ambition, its ability to sustain competition remains uncertain.

Key Takeaways

Once recognized primarily as a value stock, IBM’s transformation and focus on quantum computing indicate its pursuit of new growth opportunities. Quantum computing’s potential to revolutionize AI propels IBM forward, akin to Nvidia’s journey in graphics-based computing. However, the timeframe for IBM’s success may be protracted, and its status as a growth stock hinges on the competition it faces.

Considering these factors, IBM is positioned as an attractive investment opportunity.