To The Moon

Summary

• Microsoft's unique approach with topological qubits could offer a competitive edge in the quantum computing race.

• The Azure Quantum platform and Q# development kit create a supportive ecosystem for quantum computing research and development.

• Microsoft's experimental strategy could lead to a faster, more stable quantum computing solution if successful.

• The quantum computing market is expected to grow significantly, with potential long-term revenue growth for Microsoft if they can penetrate the market.

quantum computer

Quantum computing is a disruptive technology that has the potential to revolutionize industries ranging from finance to healthcare. With the race to commercialize this technology heating up, investors are looking for companies that can position themselves as leaders in this field. Microsoft (NASDAQ:MSFT) stands out as a strong contender due to their innovative approach to quantum computing.

By leveraging the properties of quantum mechanics, Microsoft is developing a unique approach that has the potential to accelerate its time-to-market for scaling quantum computing for commercial purposes.

In this article, we'll fully explore Microsoft's quantum endeavors and the factors that make them a potential leader in this arena, and why it may hold a crucial first-mover advantage above its competitors.

Quantum computing technology overview

Quantum computing is a radical shift in the field of computing similar to how jet engines were a massive change from propellers in the world of aviation, and thus allowed humankind to traverse vast distances. Quantum computing will allow us to process information in ways that are exponentially faster and more complex than traditional computing.

To understand the differences between classical and quantum computing, let's investigate the basic unit of information in each. In classical computing, this is known as the bit, which can be either 0 or a 1, thus giving its binary qualities. You can compare a bit to a light switch that can be either on or off. Every operation a computer performs is ultimately broken down into 1s or 0s in binary form.

For quantum computing, however, instead of bits, they use qubits, which operate more like a light dimmer. Qubits don't exist in a binary state of either a 1 or 0, but can exist in any proportion of both states at the same time, which is known as superposition. Furthermore, these qubits can be entangled, which is like having a pair of dimmers that are invisibly connected. If you were to adjust one dimmer, the other reacts at the same time, no matter how far apart they are. This in turn allows quantum computers to process vast amounts of information simultaneously, thus leading to an enormous leap in processing power for humankind. Quantum computing can therefore unlock new possibilities outside our reach, from modeling biological processes to optimizing supply chains, powering general artificial intelligence (AGI) models, and so on. This is the new frontier that Microsoft and others are exploring.

State of the quantum computing industry

The quantum computing industry is undergoing a phase of dynamic growth and exploration. Microsoft and its key competitors in the space such as IBM (IBM) and Google (GOOG) (GOOGL) are all spending heavy amounts into research and development as they race to commercialize the technology. Scaling the technology for commercial use, however, is not yet a reality, as we're still in the early stages.

But there's evidence we've fully moved beyond the realm of quantum computing existing solely in theory in recent times, as seen through IBM and Google's demonstrations that quantum computing can outperform classical ones in certain tasks, known as quantum supremacy. Although the conclusions of these companies are debated, the consensus is that quantum machines have yet to outperform classical ones across the board, as they've only been tested to outperform in specific studies.

Looking ahead, the road for companies like Microsoft to commercialize the technology is laden with engineering as well as scientific challenges. The timeline of when quantum computers will be commercialized is difficult to estimate, but some predictions put it in the five to ten-year ballpark at the time of writing.

Microsoft's role in the quantum computing industry

Here's where my thesis for Microsoft to emerge as the leader in quantum computing starts to take shape. The company is leveraging its substantial resources and expertise in software and hardware to formulate a unique approach to quantum computing.

Microsoft is developing what are known as topological qubits, which, unlike traditional qubits used by its competitors, are designed to be both more stable and less prone to errors, which could reduce its time to market for commercializing quantum technologies, as well as potentially reduce the cost of operating quantum computers in the long-run while also being more powerful. With more stability comes a reduced need for error correction, which is a major bottleneck faced by the industry. It needs to be stressed that the prediction that topological qubits will lead to these benefits is strictly theoretical and has yet to be proven definitively.

In addition to Microsoft's unique approach to qubits, it is also creating an ecosystem of quantum software and services via its Azure Quantum platform and quantum development kit known as Q#. These developments allow developers and researchers to work on quantum applications, thus fostering a community of users and future advocates that are already familiar with Microsoft's solutions. Microsoft's Azure platform and community is the other half of what sets it apart.

Microsoft has shown significant progress so far in developing a scalable, full-stack quantum machine, as shown by releasing experimental data sets as well as simulations of its quantum devices, which are publicly available. It also continues to integrate quantum hardware providers into its Azure cloud platform, which is crucial for creating a scalable solution for commercial use. Steady progress is therefore being made by Microsoft to leverage its topological qubits to give it a competitive advantage in the market.

Competition

The key issue at hand for investors is how Microsoft's development of qubits differs from its competitors, and which approach will ultimately yield a better product that will get to the market first. To start, Microsoft's use of topological qubits is grounded in solid theoretical knowledge and its concepts have been peer-reviewed and published in scientific journals. The ideas behind Microsoft's approach were proposed by mathematician Michael Freedman and theoretical physicist Alexi Kitaev, both of whom now work for Microsoft at its Q research lab. With these people at the helm, the company has since observed Majorana fermions in research and development, which are believed to be a key step in harnessing topological qubits in quantum computers. Microsoft's approach to quantum computing is considered high-risk, and high-reward as it delves deep into unexplored areas of science and engineering.

Still, topological qubits are expected, in theory, to outperform Microsoft's competitors' solutions by a wide margin in error correction and fault tolerance, which are key to delivering a scalable quantum solution as well as reduce ongoing costs. Microsoft's main competitors IBM and Google are exploring superconducting qubits, while other companies like IonQ and Honeywell (HON) are experimenting with trapped ions. To simplify matters greatly, the alternative solutions by Microsoft's competitors might have less uncertainty in research and development as they are more mature solutions and some have produced operational quantum systems, while Microsoft is taking a more experimental approach that could pay-off greatly if a multitude of variables work out in its favor.

Microsoft's calculated gamble

Here's why I believe Microsoft's experimental approach is in fact the correct strategy, keeping in mind that quantum computing is incredibly speculative at this stage, and that this thesis is subject to change based on breakthroughs by both Microsoft and the market. Microsoft's competitors, based on the knowledge we have, are working on solutions that presently have many issues. Also, building out these mature solutions may lead to different problems later on in terms of high error rates, which would necessitate them to discover error correction techniques to deliver a market-ready product. So while the mature technologies might be better understood, it's still unclear how they will solve the problems inherent to how they harness either superconducting qubits or trapped ions, thus making them still very uncertain quantum technologies overall while also being potentially less powerful and more unstable than others. Microsoft on the other hand is the only key player that seems to be exploring less understood solutions.

However, the pay-off of a breakthrough in topological qubits could mean it can offer a more stable product and potentially deliver it faster to the market than its competitors can. The future and technology is uncertain already, but through delving deeper Microsoft could carve a substantial competitive advantage for itself if the scientific understanding of topological qubits is confirmed and it is successful in harnessing it. The risk to reward ratio then could be skewed in Microsoft's favor when compared its peers, given that even established systems are already highly risky and uncertain, but their upside is also comparatively weaker to Microsoft's.

Quantum computing future trends and market growth potential

The quantum computing market is set to grow aggressively over the coming years. Overall, as the capabilities of quantum computers increase, the demand for their computing power is set to rise in tandem. Customer spend for quantum computing is forecasted to grow from $412 million in 2020 to $8.6 billion in 2027. Additionally, some forecasts expect the industry to grow at a CAGR of 28.8% from 2023 to 2028. Investment in quantum research and development is also increasing, with venture capitalists deploying $1 billion in capital in 2021. Along with the growth of the industry, several trends in this space are expected to unfold over the next decade. This includes that quantum will become a mainstream concern of businesses, commonly appearing on the roadmaps of chief technology officers.

This emergence of importance can be compared with the rise of AI and cloud computing. Then there's the expected rise of quantum software companies, which will help in the fields of error correction, quantum communication and security, as well as quantum sensing and measurement solutions. These are the trends that will be propelling Microsoft's interest.

Quantum's impact on Microsoft's financials

In the immediate future as well as in the present, we can state that Microsoft will be spending heavy amounts in research and development to make quantum computing a reality. Although Microsoft has increased R&D expenses by around 7% over the last three years, its revenues have also climbed in step with this increase. The ratio between R&D expenses and revenue has remained stable at around 12.70 on average. Therefore, Microsoft's foray into topological qubits may not be putting excessive stress on the company's financial health thanks to its impressive top-line growth.

Author calculations

Microsoft can afford to take such risks thanks to its extremely healthy and competitive gross, operating, and net profit margins when compared with its industry peers. It's particularly effective at controlling costs, which means it can channel these savings into exploring new opportunities, paying researchers excellent salaries, and continuing to reinforce its economic moat through expanding its Azure marketplace. Thus, we can say that given the trend in revenue and R&D contributions, the financial impact of Microsoft pursuing its quantum ambitions may be relatively small, and that it's very equipped financially to pursue more experimental routes in exchange for a large potential windfall.

Author calculations

In terms of a forecast of when and how Microsoft's revenues will be affected by penetrating the quantum computing market, here's a walk through of how that may play out. Some potential catalysts would include the successful development of topological qubits, which could propel the company to the forefront of the industry, as well as the expansion of its Azure Quantum services as more clients rely on the brand for their quantum computing needs. Over the next three years at the minimum, we'll see the continued research and development of Microsoft's solution, and then perhaps in the next five years or so we'll witness the first demonstration of a scalable quantum computer from Microsoft. Long-term revenue growth may be realized within the next decade or longer as quantum computing stabilizes, which could see wide-scale adoption across various industries driving significant revenue growth and shareholder value.

Risks

It's important to note that any thesis about quantum computing involves a high amount of uncertainty and speculation. We're very far from witnessing the commercialization of the technology, and breakthroughs by Microsoft's peer companies and key competitors could easily throw a spanner in the works for this thesis. Research in quantum computing operates at the bleeding edge of science and engineering, and people outside of these industries may find it difficult to even understand the subject matter at hand, let alone be informed enough to make predictions about its the future with any kind of accuracy. My thesis is based on the scientific consensus we have today, which is subject to rapid changes in the aforementioned landscape. Microsoft is taking a risk, but it's a risk that it can comfortably afford to make in my view.

Conclusion

In summary, Microsoft is positioned as a leader in the field of quantum computing, primarily due to its innovative approach to topological qubits. Although the company's strategy is high-risk, there could be a potential payoff if successful, as the solution offers increased stability and power compared to competitor solutions as its stands today. The increased stability could reduce the time to market as well as the ongoing costs of quantum computing. Microsoft's Azure platform is another draw card, integrating a community of developers and strategic partners that could further spur adoption of the company's quantum technologies.

When everything is so speculative at the very early stages of witnessing a new and highly experimental technology unfold, the best we can do is examine the information and theory available to us and update our thesis as things develop. At present I believe the research and strategic decisions made by Microsoft puts it in a favorable position over its peers, primarily since Microsoft's experimental play appears to put it in a more advantageous position than its competitors if its risk pays off, while its peers still need to carry a huge amount of risk and uncertainties around getting their quantum systems in order. For this reason I rate Microsoft as a buy for those who have a long time horizon and are eager to see the quantum landscape unfold.

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