Cambyses Financial Advisors LLC

The Quantum Market and Its Potential - October 2023

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Quantum Computing (QC) is in its infancy but may grow up fast. The current market for quantum computing is small - approximately $2.5 billion annual revenue. Today's commercial quantum products and services center around [*1]

 

• Shared quantum hardware,

• Cloud and AI accelerators (for Machine Learning and Large Language Models),

• Optimization and supply chains,

• Simulation (molecular biology and pharmacology), and

• Cryptography and Cybersecurity

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Commercial funding for quantum computing is heavily subsidized. Government funding from China, the United States, and the European Union, much of it related to cryptography, cybersecurity, and optimization [*2], reached $23.5 Billion in 2022.

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Analysts believe QC's market will grow quickly.- a Cumulative Average Growth Rate near 31% over the next five years, and an eventual $1.0 trillion market. Whether that translates to investment opportunity probably depends on timing.

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If QC follows the path several other high-tech, high-capital markets have followed: a lengthy period of slow price appreciation gives way to a rapid (and largely irrational) bubble (up and down) followed by a lengthy recovery that reflects rational investment assumptions. [*3]

 

The Quantum Computing investment-ecosystem encompasses academic and government institutions, literally dozens of privately held companies, and a number of public companies, thus, affording a variety of portfolio allocation options.

 

Diversification options among the pubic companies are limited. Virtually all the public companies occupy the Technical or Information sectors - primarily computer hardware, software, components (semi-conductors), data services (Cloud and AI), and mission-critical support services.

 

Don't hold your breath or save your allowance for consumer versions of quantum machines. Current and foreseeable QC-tech is too expensive, complex, bulky, and balky for home applications. Instead, we expect some variation on Quantum as a Service (QaaS) to emerge in the consumer market. Commercial offerings along similar lines have already entered the market.

 

The Quantum Ecosystem and Players

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Publicly traded companies in the quantum ecosystem provide a range of services and products that mirrors, with some stark exceptions, the standard computer economy:

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Full Spectrum Quantum Products and Services

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• The primary players in the full spectrum market {Amazon (AMZN), Apple (AAPL), Alibaba (BABA), International Business Machines (IBM), Alphabet (GOOGL), and Microsoft (MSFT)} provide a range of quantum services as part of their broad product offer. These companies lead the quantum industry, but are not quantum centric. For example, each of them has launched cloud services based on quantum platforms that supplement their existing cloud offer. They are the safest options for investors who want a presence in the segment, but want to avoid many of the major risks.

• While Amazon and Friends play for headlines, Honeywell (HON) subsidiary Quantinuum has quietly become the largest globally integrated quantum computing entity. 

• D-Wave Quantum (QBTS) has the distinction of being the only full spectrum and quantum centric company in Cambyses' Quantum initiative. Their product/service offer is solely based on quantum, to the exclusion of "computer classics."

 

Software

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• Standalone quantum-software developers are numerous. They constitute roughly half of Cambyses Initiative's fifty-two companies.

• Many of these companies suffer a bad case of the "Toos." They are too volatile. They are making too little money (or losing too much). Their price is too low. (Over-valued penny stocks) And finally, they are too dependent on equity infusions. (Low sales volume and minimal cash from operations) Thus, while Cambyses follows and studies these companies, we consider most of them unsuitable for our investors.

• Quantum Computing, Inc. (QUBT), a provider of quantum based finance, healthcare, and supply chain management software is archetypical.

 

Data Security

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• Depending on who and when you ask, quantum computing is either the best thing that ever happened to data security and privacy or the final death knell for both.

• Both arguments are readily supportable. Several quantum computing capabilities [*4], give rise to new, and virtually unbreakable, data encryption/exfiltration techniques. At the same time, those characteristics threaten to overwhelm existing data defenses. The U.S. Government Accountability Office and the European Data Protection Supervisor consider the latter possibility so acute that they have sponsored software development "competitions" that emphasize solutions to the encryption issue [*5].

• Arqit Quantum (ARQQ) and Quantum Corporation (QMCO) are developing data security responses tailored to both structured and unstructured quantum data.

 

Hardware

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• For most of the last 25 years, IonQ (IONQ), a trapped-ion quantum computer developer, was the sole stand-alone quantum computer manufacturer.

• Rigetti Computing's (RGTI) 2021 IPO added an additional market participant.

• With the exception of these two companies, government, academic, or "Full Spectrum" companies have developed most quantum computer platforms.

 

Semiconductors and Superconductors

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• The list of quantum semiconductor suppliers reads like The Usual Suspects: Nvidia (NVDA) and Intel (INTC) lead the development effort, followed by Advanced Microdevices (AMD) in a manufacturing role.

• Literally all of the current quantum computing paradigms support their Quantum Processing Unit (QPU) with low-temperature superconductor technology, In-house development - with each of the full-spectrum, hardware, and semiconductor manufacturers developing their own proprietary approach - accounts for most of the progress to date. Cambyses is not convinced that is the most efficient development route.

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ETFs and Mutual Funds

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• We are aware of only one quantum-focused ETF, Defiance Quantum ETF (QTUM). We note, however, that most (if not all) NASDAQ and Large Cap funds include the large-cap companies we include in our "Full Spectrum," "Hardware," and "Semiconductor-Superconductor" lists.

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Notes

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[*1] The list implies that quantum computer capabilities are best applied to multi-variate, multi-objective problems that take advantage of QC's massive scalability and parallelism. That impression may be more attributable to our lack of imagination than it is to QC's capabilities. As the technology matures, additional paradigms may emerge.

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[*2] DARPA, for example, has supported optimization, data security, and encryption studies. Like many things involving DARPA, this support has both a bright and a dark side. Optimization, for example, can be applied to assure a steady supply of needed product at least cost. With minimal changes to the algorithm and a different set of environmental sensors, it can be weaponized to facilitate target identification, selection, prioritization, and execution. The virtues of the latter scenario depend on what is being targeted, by whom, and why.

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[*3] See for example, the dot com bubble, the most recent 5-8 years of electric vehicle stock history, and where we at Cambyses believe the AI securities market is headed.

 

[*4] Quantum computers are particularly suited to vector-tensor analysis, and, by extension, to prime factorization. QCs are so good at prime factoring that one leading researcher quipped; "So far, we have spent about two billion dollars to prove that 15 = 3 x 5." Since virtually all public/private key encryption and RSA algorithms rely on prime factorization, the algorithms and the data they protect are extremely vulnerable to attack by quantum systems. The speed at which quantum computers can perform these calculations allows communications and stored data to be compromised in real time, thus weaponizing quantum computers.

 

[*5] These "quantum proofing" exercises have been less than stunningly successful. In one notorious instance, a "quantum-proof" encryption algorithm (certified as such by the U.S. Government Accountability Office) was "hacked and broken" in under one hour using an off the shelf $500 laptop, without quantum assistance.