Editor's note: Seeking Alpha is proud to welcome StockMetrix as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »
The story for quantum computing has gotten way ahead of itself. Although the market for technology will grow quickly in the next few years, we are unlikely to see it expand beyond the development stage for decades, if ever. This will cap the market potential rather quickly after companies achieve quick wins.
In 2018 several reports were released analyzing and forecasting the potential size of the quantum computing market. A report by Tractica estimates that revenues will grow from $39.2 million in 2017 to $2.2 billion in 2025. A competing report by Market Research Futures expects the market to grow at a 24% CAGR to $2.464 billion by 2022.
Source: Market Research Futures
While the reports (and there are plenty more beyond those mentioned if you care to spend several thousand dollars to purchase a copy) differ somewhat on how fast quantum computing will be adopted and integrated into the marketplace, they all point to a very bullish outlook. They all agree that the major applications will be in modeling out complex systems from biology to chemical interactions, cryptography to national defense.
Investing with the bullish thesis on quantum computing relies on understanding where the adoption will likely first take place, when it will take place, and what it will be worth.
Let’s Put The Forecasts Into Perspective
For as bullish as the forecasts are on revenue growth, let’s put the size they’re forecasting into perspective. Right now, the Semiconductor market size is $463.41 billion. Growth has been around 12.4%. All things being equal, the expectation is that by 2022 we’ll be somewhere around half a percent of total Semiconductor spend, which seems reasonable, even though the growth of quantum computers clearly outpaces that of Semiconductors’ 2 to 1. However, trying to forecast beyond a handful of years becomes exceptionally difficult for the reasons we’ll discuss later.
Pioneering Will First Be Seen Cryptography & Complex Systems
Let’s quickly review why quantum computing is all the rage. Quantum computing utilizes properties from quantum physics that people claim “defy the laws of classical physics.” This involves superposition, where a qubit can be a 1, 0 or both, as well as entanglement, where two qubits can interact simultaneously regardless of the distance. What this allows certain models to do is evaluate complex systems (kind of like if a butterfly flaps its wings in Florida, it causes a tornado in Kansas) at a much more rapid pace.
The topic everyone first throws out with quantum computing is Cryptography or code cracking. Current cryptographic systems work on a combination of one or more models that would take inordinate amounts of time to crack with existing systems. In theory, quantum computers can use unique algorithms (IE Shor’s algorithm) that reduce the time to something manageable.
Now think about which industries use cryptography to encode information. The primary candidates are national security and finance. Both rely heavily on data security. Cybersecurity alone is expected to grow to $181.77 billion by 2021 according to Zion Market Research. Cloud security spending is expected to top $12 billion around the same time. Imagine you had a computer that would render all of this technology worthless. From Palo Alto Networks (PANW) to Cisco Systems (CSCO), cybersecurity and networking companies would do well to maintain some eye towards the future. However, as we’ll discuss later, the quantum computers that are being developed and will be created in the next decade aren’t likely to flip the switch overnight and allow criminals to drain your bank account. Nor will these computers push past national security blockades anytime soon. The amount of computing power and accessibility required to achieve either of these tasks is well beyond our current capabilities.
However, it’s entirely likely we’ll see applications to complex systems of biology and chemistry. It’s expected that the market for biopharmaceutical research using quantum computers could reach $15-$30 billion by 2027. As quantum computers grow in power and depth, they’ll be able to simulate complex interactions between organisms and chemicals. Biogen recently finished an experiment showing that “quantum computers have the potential to speed up drug discovery for diseases such as multiple sclerosis, Alzheimer’s and Parkinson’s.”
How Market Followers Will Use Instantaneous Information
As we discussed previously, one of the interesting attributes of quantum physics is the ability to exchange information between entangled particles simultaneously. This means that you could be on the other side of the galaxy, and you would still receive information as soon as I share it. In 2017 Chinese scientists “teleported” information a distance of 870 miles from Earth up into space.
Now imagine that all of the computers are connected through aspects of entanglement that allow for the instantaneous transfer of information between systems. That’s one of the elements behind a potential quantum internet. This can change everything from the speed at which data is exchanged to how it is exchanged. AT&T has already begun collaborating with the California Institute of Technology to form the “Alliance for Quantum Technologies.” Though most expectations are that the applications for a quantum internet go well past 2050, the impact on global life and markets encompass everything from how we access data to how we use it. Consider that the telecommunications spend in 2018 is expected to surpass $1.45 trillion.
For All The Hype We’re Probably Much Further Off Than You’ve Been Told
If you’ve seen the movie The Imitation Game, you’re familiar with Alan Turing who created the first computer akin to what we have today (though the first computers were actually invented a few years earlier). Let’s start with the first computer that IBM put out in 1953. That’s probably a good starting point to understand the length of time to get to what we’d consider useful computing technology. From 1953 it took nearly 30 years before we started having computers that resemble anything close to what we have today.
Think about blockchain for a moment. The blockchain is a technology that we both can use and scale and aren’t waiting to develop. Yet, according to a study by Gartner, 77% of CIOs have no interest in the blockchain. Only 1 percent of respondents indicate the adoption of the blockchain. This is a known, proven technology that we have access to. However, society and the broader market are still years away from anything close to meaningful adoption.
So let’s add a little more water on the fire. Quantum computing technology currently has a whopping total of 72 qubits, led by Google (GOOGL). In theory, a 100-qubit computer would surpass the computing power of all the supercomputers combined (though it’s not an exact comparison). However, there is a problem because as you get more qubits, the errors increase.
One of the biggest challenges that most often isn’t discussed is the quality of the qubits. Companies such as IBM (IBM) have moved alongside Google to create better qubits. Current qubits hold their quantum state for fractions of a second, and as more of them are linked, they create random errors. The chart below shows how progress in the field is represented on a two-dimensional graph.
Source: Tiffany Trader, HPC Wire, 4/26/2018
It should probably also be mentioned that current quantum computers require a super cool state in order to achieve current results. This isn’t exactly scalable at the moment, though you can access some of these quantum computers through the cloud.
One of the last impediments, though not as significant, is the lack of code we have to utilize quantum computers. Current algorithms and computer code take advantage of the linear computing that current processors use. Quantum computers will require an entirely different approach to be able to program and achieve the desired results. This lends itself more towards investments in education rather than any likely startups disrupting the marketplace.
What This Means For The Market Growth in The Near Term
It remains unlikely that the market for quantum computing will grow much more than it’s projected to achieve in the next 5-10 years. Investors will be limited in how and where they can invest for returns in this field, as well as how much profit they can make.
Companies like IBM, Google, Intel (INTC) and others are partnering on a large scale because the technology requires substantial collaboration to make the significant breakthroughs. And though many of the research papers suggest remarkable growth through much of the next decade, they don’t go beyond that because this technology hasn’t been developed in any commercially practical way. It’s entirely possible that quantum computers could be the next fusion power where every ten years we’re only 10 years away.
The initial applications will most likely be academic in nature rather than anything useful for commercial purposes. That isn’t to discount the potential of the technology. But instead to put it in context. Any of the spending that the market will see over the next decade for the research and development of quantum computing will likely be just that, without any commercial applications for years, possibly decades.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.