IonQ (IONQ) Stock Lacks Needed Catalysts

IonQ Inc. (IONQ) has seen its stock price double over the last month, with shares rising more than 50% in the two days following the release of its third-quarter financial results. This surge has sparked renewed interest in the quantum computing firm, particularly its progress in quantum networking. However, despite the excitement surrounding IonQ’s technology, I’m bearish given my concerns about the company’s path to commercialization and its current valuation.

IonQ’s Quantum Progress

Before getting to why I rate IONQ stock a Sell, let me explain the company’s business. For those of you unfamiliar with IonQ, it operates in a field that leverages the principles of quantum mechanics in order to transmit information. There two main principles to note are superposition — that’s the ability of a qubit (quantum bit) to be in multiple states at one time — and quantum entanglement, a state where one qubit is connected to another regardless of the physical distance between them.

These principles enable quantum computers to perform certain calculations exponentially faster than traditional computers, potentially revolutionizing fields like cryptography, drug discovery, and complex simulations. IonQ has achieved two significant milestones in quantum networking in 2024: demonstrating ion-photon entanglement for commercial use and showcasing remote ion-ion entanglement. These achievements bring IonQ closer to developing scalable photonic interconnects, an important step in realizing practical quantum networks.

This has led IonQ’s CEO Peter Chapman to express optimism about the company’s quantum networking products, stating they are expected to be the first product group to become cash-flow positive.

IonQ’s Partnerships

Despite my bearish view, I must admit that IonQ has been successful in leveraging and building new partnerships. IonQ acquired Qubitekk in November for $22 million, adding 118 U.S. and international patents focused on quantum networking hardware and network security.

The firm has also signed development partnerships with NKT Photonics to develop advanced laser systems for quantum systems, AstraZeneca (AZN) to create a quantum development center for biopharma, and Ansys (ANSS) to integrate quantum computing engineering software.

These have complemented notable government contracts, including a $54.5 million contract with the U.S. Air Force Research Lab, and a $5.7 million contract with the Applied Research Laboratory for Intelligence and Security. These contracts focus on quantum communication technology and represent a transition from lab experiments to real-world applications.

IonQ’s Market

Now for the reasons why I rate IONQ stock a Sell. Quantum computing could be revolutionary, but the potential of quantum networking isn’t as large as I had anticipated with McKinsey estimating the quantum communication market at $36 billion by 2040.

While the projected $36 billion quantum communication market is significant, IonQ’s current market capitalization of $6 billion seems disproportionately high given the long timeline and uncertainties involved.

Valuation Concerns

This leads me to some financial and valuation concerns. The company’s balance sheet shows declining cash per share and increasing debt, although the net debt remains negative at $347 million. Cash flow statements reveal negative operating and free cash flows, which is not uncommon for early-stage technology companies but remains a concern for investors.

Meanwhile, valuation metrics suggest that IonQ may be overvalued compared to its industry peers. The company’s price-to-book (P/B) ratio is the highest among its competitors, indicating that investors are paying a premium for IonQ’s potential rather than its current financial performance.

IonQ’s Execution Risk

Another reason I rate IONQ stock a Sell is the widely shared concern about the commercialization of quantum technology. Quantum theory has existed for nearly a century, yet its practical applications have remained elusive. The gap between theoretical understanding and real-world implementation continues to be a major hurdle, hindering widespread adoption and commercial viability in various industries.

As such, it may take years before its quantum technologies are ready for widespread commercial adoption. There’s also technical limitations, with IonQ still operating in the noisy intermediate-scale quantum (NISQ) realm, and facing challenges related to qubit coherence and error correction.

It’s also the case that IonQ faces competition from mega-tech companies that have invested billions into quantum technologies. And, there is no guarantee that IonQ will retain any technological advantage it may have at this time.

Is IONQ Stock a Buy?

On TipRanks, IONQ comes in as a Strong Buy based on three Buys, one Hold, and zero Sell ratings assigned by analysts in the past three months. The average IONQ stock price of $19.23 implies 33.3% downside from current levels. 

Read more analyst ratings on IONQ stock

Conclusion

While IonQ has made notable strides in quantum networking and secured promising partnerships, the company’s path to profitability remains uncertain. It’s easy to get caught up in the excitement of a new and possibly revolutionary technology, but investors need to remain grounded.

Again, I’m bearish because the quantum communication market’s projected size of $36 billion by 2040 seems modest compared to IonQ’s current $6 billion market cap. With negative cash flows, a high valuation, and substantial execution risks, IonQ’s stock is likely overvalued. I believe investors should approach with caution, considering the high risks and uncertain timeline for commercial viability.