Quantum Computing Heats Up But is IONQ Stock Overcooked?

Investors are always on the lookout for the next big thing, and following the success of AI in recent years, it’s no surprise to see stocks in the quantum computing space soaring. IonQ (IONQ) has emerged as one of the frontrunners in the space, but I fear that realizing sustainable profits is still a long way off for this quantum computing specialist.

While the company’s trapped-ion technology is often considered a significant improvement from superconductors, there is still plenty of uncertainty to iron out, meaning that the lofty valuation is precariously poised. I’m optimistic that the technology can lead to meaningful success in the long term, but for now, I’m bearish, mainly on the thesis that the 285% surge over the past year is rather excessive and that bullish investor sentiment is overcooked.

Is IonQ’s Business Model Sufficient?

While quantum computing has been around for a few years, there are still only a handful of publicly traded companies. Unlike the computers we currently use daily, quantum computing leverages a concept called qubits, which can exist in multiple states simultaneously. This complex but incredibly exciting idea enables a range of performance improvements exponentially faster than current capabilities. IonQ differentiates itself from others with trapped-ion technology, which theoretically enables a further range of complex improvements, including longer coherence times (how long the computation can operate) and improved qubit connectivity (the ability for the technology to talk to itself while processing).

Competition in the space is naturally fierce, with mega-caps such as Google (GOOGL) and IBM (IBM) looking to build out capabilities alongside more nimble start-ups such as Rigetti Computing (RGTI) and D-Wave Systems (QBITS). Of course, this battle could dominate the market for years as technology advances, but breakthroughs are notoriously unpredictable and require enormous resources.

IBM and Google have demonstrated some capabilities in quantum error correction, which looks to minimize the number of errors conducted in processing. IonQ is still somewhat untested in this area, and with one eye on practical execution at commercial levels, investors will want to see proof that trapped-ion systems are indeed the way forward.

IonQ’s Financial Sustainability Puts Valuation into Doubt

Despite being one of the larger companies in the space, at a market cap of $8.4 billion, a look at the balance sheet shows it is a long way from profits. Management has secured some impressive contracts in the last few years, including a $54.4 million USAF Research Lab deal, but this does not come cheaply, with operating costs rising 36% in the last year, now at $65.5 million. This has led to a net loss of $54.5 million in Q3, significantly worse than the $44.8 million Q3 loss in the previous year. While losses are to be expected with emerging technology, especially in the initial stages, investors will be looking for signs that the technology has some earnings potential at scale rather than just being an experiment for several companies.

The company holds some decent cash reserves at $36 million, far outweighing the debt of just under $4 million, but I’d be keeping an eye on the burn rate of the business, which could eventually lead to share dilution as more financing is required. This has been significant in previous years and could potentially be a major barrier to investor confidence, with shares losing value with each dilution.

IonQ Risks Exceed Shareholder Rewards

There are many technical barriers to be overcome before IonQ’s technology becomes commercially viable at scale. High error rates and difficulty maintaining coherence make commercialization a much longer-term objective, with developing prototypes and proofs-of-concept far more likely to be at the center of management’s mind. Nvidia CEO Jensen Huang recently poured cold water on the excitement at CES, stating that “useful quantum computers may still be 20–30 years away.” While some argue that this is an exaggeration, from an investor perspective, with uncertain revenues, likely dilution, and high cash burn, there are plenty of reasons to be concerned.

In current market conditions, IonQ has multiple market peers, including firms with larger balance sheets and greater resources that could quickly mop up market share. IonQ has made some interesting acquisitions to develop a reputation as a leader in the sector, with a wide range of patents and advanced technology. However, whether this is enough to take on the giants of the tech space remains to be seen.

Is IonQ Stock a Buy?

After a 300% rally, it’s no surprise that many analysts remain cautious about the next few quarters. Many insiders and cautious investors will be tempted to trim their positions after such a run, especially considering the valuation concern.

Despite the company’s various risks, Wall Street is optimistic about IONQ stock. On TipRanks, the stock carries a Moderate Buy consensus rating based on four Buy, two Hold, and zero Sell ratings over the past three months. Notably, not a single analyst rates IONQ as a Sell.

Currently, IonQ carries an average price target of $44.20 per share, implying a 12% upside potential from current levels.

See more IONQ analyst ratings

IonQ is Overpriced and Underisked

IonQ is undoubtedly an exciting company at the forefront of some amazing technology, but with no clear path to profitability, an uncertain timeline, and a high valuation, it feels too risky a bet for me at current levels.

The quantum computing potential is vast, but until management can demonstrate its ability to commercialize its products at scale, I’m apprehensive about initiating a long position in IonQ stock after such an extended bull run. I’ll be keeping a watchful eye on how quantum computing develops, intending to bet on a particular horse further into the race. As a reasonably cautious investor, I consider investing in embryonic sectors with any significant weight unwise. I rate this quantum computing pioneer as a Hold until I see more meat on the bone of its market strategy over the coming quarters.