We recently published a list of 10 Best Quantum Computing Stocks to Buy According to Analysts. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against other best quantum computing stocks to buy according to analysts.

The modern digital world is built with its transistor-based chips on the foundations of Quantum Mechanics, the physics governing the world at the fundamental level.

However, the world has barely scratched the surface when it comes to the full potential of Quantum Mechanics, that is, until Quantum computing came to the foray. In the same spirit but in different light to its classical counterpart, quantum-computing technology seeks to exploit particle superpositions for computing operations.

It differs from classical computing due to the particle superpositions that occur at the quantum scale, allowing a qubit to be in a state of both 0 and 1 until it interacts with the environment. This exploit would allow Quantum computers to outperform classical computers exponentially in certain computing tasks. This could have huge implications for healthcare, finance, telecom, and energy industries, among others, ushering the world in a new era of accelerated economic growth. Mckinsey estimates that an economic value of $0.9 – $2 trillion can be extracted by 2035 across four industries – chemicals, life sciences, finance and mobility – due to quantum computing.

The McKinsey report estimates the Quantum computing market size to be between $45 billion to $131 billion by 2040.

Precedence Research appears more conservative and probably more grounded (You’ll see why). According to their report, the market for quantum computing is around $1 billion as of this year and is projected to expand at a CAGR of 30.9% from 2024 to 2034, reaching a size of $16 billion by the end of the forecast period. The US is expected to comprise $7 billion of the projected quantum market pie by the end of 2034. The market in the US is expected to grow at a CAGR of 31.2% from 2024-2034. As of 2023, North America unsurprisingly comprises 61% of the quantum-computing market.

As we point out in a similar article from May, analyzing the quantum-computing equity market based on an ETF exposed to it is a bit tricky. Very few companies have core business related to quantum computing and most companies in these ETFs have peripheral Quantum computing projects but are big and high-performing in other industries that are core to their business, so an ETF’s performance wouldn’t be saying much about the quantum computing industry.

Therefore, we’ll delve a little deeper to see what actual challenges there are in the industry and whether they can be practically solved for the delivery of a return on investment as far as scalable practical use cases go.

Technological Challenges with Quantum Computing 

Solving Quantum computing is akin to a Herculean labor. It’s hard to argue with the laws of physics, and when it comes to Quantum computing, a major problem yet to be overcome is Decoherence-induced errors. Decoherence is the enabler of transition from Quantum physics to the everyday physics we experience. Qubits (the quantum equivalent of bits) can only remain in a superposition as long as there’s no interaction with the environment.

Even the slightest interaction causes them to decohere to classical bits, introducing computing errors. The hard part is to keep them in a superposition long enough for quantum computation to be viable. Further, to scale quantum computing, you have to add more qubits to the system, but adding more qubits, in principle, increases the probability of error. Finally, any approaches to error correction must obey the Quantum no-cloning theorem, which makes these approaches inherently more challenging than their classical counterparts.

Progress to Overcome Challenges

In 2022, Azure Quantum demonstrated the soundness of physics required to build topological qubits (these qubits are different in that they can maintain coherence for longer and would thereby lead to a reduced error rate through more stability).

On the other hand, Researchers at Quantum AI, an arm of another big tech company, made a breakthrough in 2023, demonstrating a reduced error rate even with an increased number of traditional Qubits. However, rare correlated error events that happened roughly every hour limited the exceptionally low error rate required for practical quantum computing, with more research required to tackle them.

What the Big Money Says

Despite these steps, the challenges remain to be effectively overcome. It’s anyone’s guess how long it’ll take for quantum computers to scale and become economically viable. If the amount of capital being invested by venture capital firms in the industry is any guide, it certainly doesn’t look good for the industry as of recent.

According to IQM’s State-of-Quantum Report of 2024, the venture capital invested in Quantum startups dropped by 50% worldwide in 2023 compared to the year prior, with the US quantum startup ecosystem seeing the greatest decline of capital at 80%.

As far as public equity in the quantum computing industry goes, it is overall yet to be profitable. The industry hasn’t experienced any operating leverage in any meaningful sense and is focused on growing revenue in its early stage. The hard problems with regards to practicality and scalability has resulted in many quantum computing stocks  trade at price levels that make them non-compliant with stock exchanges, resulting in delisting threats by stock exchanges.

Also read why Jim Cramer can’t recommend a particular quantum computing stock here.

Methodology

For our list, we’ve selected companies that have a presence in the quantum computing industry and ranked them on the basis of their 12-month price upside on analysts’ consensus. Please note that we have used the median upside because average upsides can be greatly affected by outlier analysts on either side of the low or high.

For some stocks, both mean and median upsides were too low, but since we wanted to limit our list to pure-play stocks as much as we could, we chose them using the high end of the upside, provided that at least 9 analysts had contributed to their average upside.

Finally, we ranked the stocks on weighted scores, with median upside having a weight of 0.4 while analyst count having a weight of 0.6. For stocks for which we have used high-end of the upside, the weight for the upside is 0.2, with analyst-count weight reduced to 0.4. For stocks whose upside is based on only one analyst, and if the upside is over 30%, we assigned weights of 0.01 to both the upside and the analyst count.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

READ ALSO 10 Best Future Stocks for the Long Term and 10 Best Affordable Stocks Under $10 to Buy.

Microsoft Corporation (NASDAQ:MSFT)

Median Upside Potential: 15.79% 

Number of Analysts: 33

Insider Monkey Weighted Score: 26.1

Microsoft Corporation (NASDAQ:MSFT) is another big player in the quantum computing industry. Microsoft is taking an approach to error-rate reduction that is considered more challenging but also more rewarding. In 2022, Microsoft Corporation (NASDAQ:MSFT)’s initiative – Azure Quantum – demonstrated the proof of concept for building topological qubits. These qubits are inherently more resilient to decoherence than traditional qubits.

In February 2024, Microsoft announced that DARPA renewed funding for Azure Quantum to develop a utility-scale quantum computer based on topological qubits, due to the project’s promising recent results. The company will design a prototype for a fault-tolerant quantum computer based on topological qubits.

Overall, MSFT ranks 4th on our list of best quantum computing stocks to buy according to analysts. While we acknowledge the potential of MSFT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.