2 Top Quantum Computing Stocks to Buy in July

Key Points

• Alphabet doesn't need quantum computing to be a successful investment.

• IonQ's approach to quantum computing should allow it to scale more easily.

Quantum computing is an interesting investment sector. Several companies compete in this field, ranging from tech giants to start-ups. However, most companies within this field agree that monetization of quantum computing is still a few years away, but it's getting closer.

The tricky thing for investors to balance is getting in at the right time. If you're too early, you might miss the rise of current investment trends, like artificial intelligence (AI). If you're too late and quantum computing becomes the next hot investment trend, you've missed out on potentially huge returns.

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Right now is a solid time to invest in some quantum computing companies, especially if you pick the right ones.

Image source: Getty Images.

1. Alphabet

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is Google's parent company and is devoting significant resources to quantum computing research. Google kicked off the quantum computing investment cycle in December with its Willow chip, which solved an incredibly difficult problem in record time and with superb accuracy. This highlighted other quantum computing stocks, causing the entire industry to rise.

Should Google deliver top-notch quantum computing technologies, it stands to benefit in one area in particular: AI. Quantum computing could unlock the next phase of AI, leading to unprecedented performance. This would give Google the leadership position in AI, leading to a huge increase in cash flows in its core business.

This gives Alphabet a huge incentive to continue innovating in quantum computing. With its already massive cash horde and cash flows, it has the resources to devote to this field.

Even with Alphabet's innovative mindset and top-notch technology, the market doesn't respect it. Investors are still worried about it losing market share from its Google Search business, so it trades at a cheap valuation.

GOOG PE Ratio (Forward) data by YCharts

It's important to note that 18.5 times forward earnings is unbelievably cheap for a big tech stock like Alphabet. It basically indicates that the market values only its Google Search business, not any of the potential gains from quantum computing. As a result, I think it's a great pick because it offers massive upside if it can win the quantum computing arms race, while also capitalizing on a potential turnaround in the market's perception of its search business.

2. IonQ

While Alphabet is a conservative choice for quantum computing, IonQ (NYSE: IONQ) is more aggressive. Its only revenue comes from various contracts that it has signed, and there is no backup plan; it's quantum computing viability or bust.

However, because it's a small company, incremental market share gains in quantum computing will deliver huge returns. This high-risk, high-reward approach isn't for everyone, and investors must accept that the likelihood of failure is likely greater than success. But if IonQ gets it right, that risk could pay off big time.

Regarding a timeline for revenue and profitability, IonQ's CEO believes that by 2030, the company will be profitable and generating nearly $1 billion in annual sales. That's a mere five years away, but if IonQ can hit that timeline, the stock will be a successful investment.

I prefer IonQ over many of the other pure-play start-ups due to its partnership with the U.S. Air Force Research Laboratory and its unique approach to quantum computing. It utilizes all-to-all qubit connectivity, enabling superior error correction. It also uses a trapped-ion approach, which allows quantum computing to occur at room temperature versus at nearly absolute zero (which is incredibly expensive to do). This makes IonQ's approach sensible and scalable, making it the most likely to succeed of the various start-ups.

I think investors should have significant exposure to Alphabet and a small exposure to IonQ. This strategy involves investing most of their money in a stock that has a higher chance of success, while keeping a smaller bet on a long shot. However, if that long shot works out, it can deliver massive returns despite a small initial investment.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.