Should I Buy IBM Stock for Its Quantum Computing Capabilities?

International Business Machines (NYSE: IBM) has redefined itself as a cloud and artificial intelligence (AI) company. Its role in fostering a hybrid cloud and its watsonx AI have again made it a company to watch in the technology space.

A part of IBM that may have received less coverage is its role in quantum computing. In many respects, IBM leads the way in that industry, and many investors may wonder whether that cutting-edge technology makes IBM stock a buy.

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IBM stock and quantum computing

Quantum computing is a potentially promising but uncertain technology for IBM. Traditional computing bits are made up of either 0s or 1s, which limit computing speeds. In contrast, qubits, or quantum bits, can hold any value between 0 and 1, which can increase computing speeds exponentially.

It is in this environment that IBM has built its quantum computing fleet. Its quantum computing stack includes services and tools provided by IBM and its third-party partners. IBM Quantum serves its customers through Qiskit, a suite of software tools and services providing customers with a holistic quantum experience. This includes managed services, a tool kit, and a serverless interface where customers can run workloads through both quantum and traditional resources.

Still, advancements in processing power have exposed a key challenge. The more qubits a chip can process, the more error-prone it becomes, which could negate any benefit that quantum computing offers.

However, error mitigation has become a priority in IBM's advancements. Its newly released Heron chip addresses the potential for errors while running twice as many gates, a basic quantum circuit, as it could two years ago. More importantly, it represents the continuation of IBM's quantum development roadmap, which promises an advanced, error-corrected system by 2029.

Technical challenges

All in all, IBM's quantum computing shows potential for leadership in this industry. However, when looking outside of science and research, quantum computing is, in many respects, a solution without a problem. While exponentially faster computing could provide tremendous benefits, the industry must outline how the technology can solve problems in the commercial realm.

Moreover, the quantum computing industry has become tremendously competitive. Google parent Alphabet has just developed its Willow chip, which promises to reduce error rates as it adds qubits. Also, start-up quantum computing companies like IonQ could disrupt larger companies if it develops competitive advantages. While its quantum ecosystem could help IBM stand out, the company may struggle to distinguish itself as the competition intensifies.

IBM's financials

Additionally, IBM's financials may offer a mixed bag to investors. Even with its successes with the cloud and AI, IBM's revenue of $45 billion in the first three quarters of 2024 rose by less than 2% yearly. Its most successful segment, software, grew revenue by only 8% during this time.

Despite slow revenue growth, free cash flow in the first nine months of the year was $6.6 billion, up from $5.2 billion in the same year-ago period. That allowed the company to fund the $4.6 billion needed to maintain its dividend during that time.

The payout, which has risen for 29 straight years, is now $6.68 per share annually. With a 3% dividend yield -- far above the 1.2% S&P 500 (SNPINDEX: ^GSPC) average -- IBM is arguably the dividend stock of the cloud and AI. That source of cash could pay investors to wait for quantum computing to hopefully live up to its potential.

Furthermore, in order to benefit from this opportunity, investors will have to contend with the stock's P/E ratio of 33. That is higher than Alphabet, which currently sells at 26 times earnings despite double-digit revenue growth. Indeed, some investors will find IBM's dividend attractive, but for most investors, the company's higher valuation could make it a less appealing value proposition in the quantum computing space.

Should you invest in IBM?

Considering the state of the quantum computing industry and the stock's valuation, investors should probably stay on the sidelines, unless buying for the dividend income.

Admittedly, IBM's moves in the cloud and AI spaces have made it a serious competitor in the cloud and AI spaces. If the company can commercially apply its quantum computing capabilities, it could become a top tech stock again. Its growing dividend with a high yield should also make it appealing to dividend investors.

Unfortunately, the company's revenue growth lags that of peers like Alphabet. As long as investors can buy the Google parent more cheaply, IBM is probably not the quantum computing stock of choice for non-income investors.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and International Business Machines. The Motley Fool has a disclosure policy.