To The Moon

Jensen Huang, CEO of NVIDIA, recently made an important statement about the current state of quantum computing, adding a dose of reality to what many in the tech industry have considered to be the "next big thing." According to Huang, the quantum computing field is still "several orders of magnitude" (roughly five to six) away from achieving the necessary scale of qubits needed for practical applications. This puts into perspective the immense gap between today's capabilities and the lofty promises often made by quantum computing advocates.

While Huang optimistically suggested that a functional quantum computer could be developed within the next 15 years, he also warned that waiting too long—specifically, 30 years—might render the endeavor irrelevant. Instead, he proposed a more conservative timeframe of around 20 years for quantum computers to make a significant impact. This is a perspective that, while cautious, aligns with what many experts in the quantum computing community believe: we are still in the early stages of a long road ahead.

A Reality Check on the Quantum Computing Hype

For investors in quantum computing stocks, Huang’s remarks serve as a sobering reality check. For years, the promise of quantum computing has driven up valuations of companies claiming to be at the forefront of this emerging technology. However, Huang’s comments remind us that despite the excitement and the flood of investments into this space, we're still far from delivering on the transformative potential that quantum computing promises. This could be bad news for some of the overhyped, overvalued stocks in the quantum computing space.

Despite the long-term potential, many quantum computing companies remain in the early stages of development. The technology is not only difficult to build but also expensive to scale. Current quantum systems are fragile, and the number of qubits, while growing, is still far from the necessary threshold to solve real-world problems. This discrepancy between current capabilities and future potential poses a significant risk for investors looking for immediate returns. So, is it time to short or buy the dip in these quantum stocks?

Why I Wouldn't Short Quantum Stocks... Yet

While Huang’s comments may make quantum stocks appear like a risky bet, shorting them could be a premature decision. The fundamental problem with shorting is that the hype surrounding quantum computing is not going to dissipate overnight. Investors have poured billions into the space, and while many of these stocks may be overvalued, the market’s optimism about long-term breakthroughs could persist for several more years.

Furthermore, the companies in this space are often well-capitalized and have the backing of powerful institutional investors and government support. In the U.S., for example, the Department of Energy and other government bodies have made substantial investments in quantum computing research, signaling that the sector will remain well-funded for the foreseeable future. Even if the technology remains years away from becoming practical, these resources could help sustain the stocks in the interim.

But Neither Am I Buying the Dip

On the other hand, buying the dip in quantum computing stocks isn't an attractive proposition either, at least not yet. The technology’s infancy, coupled with Huang's cautious timeline, means that any dips in stock prices might still not represent a true buying opportunity in the near term. These stocks are priced largely based on future expectations rather than current realities. Given that it could take decades for quantum computing to fully materialize, investors need to be prepared for volatility and the possibility of prolonged stagnation.

Moreover, the quantum bubble—if we can call it that—has seen inflated valuations in companies with unclear or unproven paths to commercialization. While quantum computing holds incredible potential, there’s a very real risk of major corrections in the market as investors eventually come to grips with the long development timelines. With many quantum stocks priced as if they will deliver major breakthroughs in the next few years, the market might see significant pullbacks as it comes to terms with the actual pace of progress.

Factors Investors Should Consider

1. Long-Term Investment Horizon: Quantum computing is undoubtedly a transformative technology, but it's going to take time. Investors who believe in its future should adopt a long-term mindset, understanding that immediate returns are unlikely. If you're investing in quantum computing, be prepared for a prolonged timeline with plenty of setbacks along the way.

2. Government and Institutional Support: Government funding, especially in the U.S. and Europe, is a major factor in driving the quantum space forward. This means that even if commercial breakthroughs are still far off, there will be sustained investment in the technology for years to come. These government-backed initiatives could help bolster the stocks of key players, even if technological progress is slow.

3. Technological Developments to Watch: Keep an eye on advancements in qubit coherence, error correction, and quantum error mitigation techniques. These are key challenges that need to be overcome for quantum computers to become practically useful. Any breakthroughs in these areas could significantly change the outlook for quantum computing, potentially spurring renewed interest in certain stocks.

4. Valuation vs. Potential: It's important to differentiate between companies that have already made progress and those that are purely speculative. Some quantum startups may be years away from practical applications, while others may be closer to breakthroughs. Scrutinize the teams behind these companies, the technical problems they are trying to solve, and their funding status to assess whether they are genuine contenders in the race for quantum supremacy.

5. Diversification in Tech Investments: Given the uncertainty surrounding quantum computing, it may make sense to diversify tech investments. Instead of focusing exclusively on quantum computing, consider allocating funds to companies in the broader AI, semiconductor, and classical computing sectors, all of which will benefit from advancements in quantum research, even if they are not directly involved.

Conclusion: Patience and Caution are Key

In the end, while the current state of quantum computing may seem discouraging based on Huang's assessment, it’s important to remember that technological revolutions rarely happen overnight. The reality is that quantum computing will likely take decades to become a major commercial force. Therefore, while quantum stocks may experience volatility and some overvaluation, they are not likely to become irrelevant anytime soon.

For investors, this means taking a cautious approach: don’t short the stocks just yet, but also don’t buy into the hype. The market for quantum computing will continue to evolve, and it’s crucial to stay informed about both the technological and economic factors that will shape this next frontier. The future of quantum computing is full of promise, but the path to realizing that promise remains uncertain.