IonQ (NYSE:IONQ) is a quantum computing startup that, like many of its peers, has seen its stock prices soar over the last year.
Shares on IONQ are up nearly 500 percent, and many quantum computing bulls still believe that there could be further room for advancement.
What is the ceiling for IonQ stock, and how risky is it as an investment in the next generation of computing technology?
Has IonQ Cracked the Code to Commercializing Quantum Computing?
IonQ’s approach to quantum computing is fairly unique and uses trapped ion technology, a type of quantum computing known for its comparatively high coherence rates. IonQ is attempting to establish itself as a quantum service provider, offering access to its technology through major cloud providers like AWS.
The business is already generating revenue, albeit at a fairly low level. In Q1, IonQ reported $7.6 million in total revenue, though it also reported a net loss of $32.3 million.
One of the brighter spots in the quarterly report was a $22 million deal with EPB to create a commercial quantum networking hub. Though such deals are modest in size, they help to keep IonQ in a leading position when it comes to commercializing quantum technology.
With all of this said, it’s important to recognize that quantum computing is still in its infancy and could be years away from widespread commercial viability.
Even with intense research ongoing, it could easily be eight years or more before quantum computing starts to take off seriously on a commercial or industrial level. This puts the lion’s share of IonQ’s potential revenues, and by extension its chance to generate significant profits, quite a long way in the future.
IonQ’s Early Advantage in Quantum Software
Although IonQ’s hardware is certainly impressive, its real potential could be in its development of quantum computing software.
IonQ has developed hardware that can integrate with major cloud computing platforms and is working to establish a leading quantum programming environment.
By providing software for quantum computing as more and more businesses explore the technology’s potential, IonQ establishes an early lead in the industry and become the go-to solution when it comes to quantum software.
IONQ Is Already Past Analyst Price Forecasts
IonQ has received a small but remarkably bullish group of analyst price forecasts that range from $30 to $55 per share. The average of these price forecasts is $44.17, a price that implies a downside of about 1.8 percent.
It’s also worth briefly noting the extreme valuation metrics IONQ shares have reached. The stock now trades at over 227x sales and 14.6x book value, despite still lacking positive earnings or cash flows.
With commercialized quantum computing still potentially years away, these pricing multiples could prove to be unsustainable.
Another practical problem with IONQ from an investor perspective is the fact that the business has consistently diluted its stock by issuing new shares. The number of outstanding IONQ shares has risen drastically throughout its public history, and another $1 billion equity offering was announced earlier this month.
While this has resulted in IonQ having a strong balance sheet with ample room to invest in research and development, it also risks watering down a stock that is already trading at extremely high multiples driven by expectations of massive future growth.
IonQ’s Vulnerability to Competition
Another potential problem that could put a damper on IonQ’s future returns is its vulnerability to competition from both other quantum computing startups and much larger businesses. On the startup front, IonQ faces a number of prominent competitors like D-Wave Systems and Rigetti Computing. Even with IonQ’s early edge on the software side of the business, it seems a little too early to fully write off other startups that are working along similar lines in a tech field that is still in its extremely early days.
More troubling for shareholders, though, is the strong possibility that one of the large tech companies will steal a march on IonQ in the realm of quantum computing. Google parent Alphabet, in particular, could be poised to succeed in quantum computing.
The tech giant has not only developed its own cutting-edge quantum chips but also successfully managed to reduce error rates while at the same time scaling up the number of qubits. Given its vast resources, Alphabet is realistically the prime candidate to become a market leader in quantum computing in much the same way it has put itself in a strong position among AI businesses.
How High Can IONQ Stock Go This Year?
The most bullish analyst forecast is only about 22 percent above IONQ’s current trading price indicates that it is finally approaching its reasonable price limit.
It’s difficult to predict a definite ceiling for IONQ shares, as the stock has continued to climb in spite of a valuation that seems difficult to justify.
With serious commercial viability still several years out, it would likely take significant new developments or an upward swing in revenue growth to push the stock much beyond the $50-55 range in the near future.
Indeed, it seems likely that IONQ, among other quantum computing stocks, could be set up for a downward correction. Early this year, many quantum stocks sold off severely on nothing more than NVIDIA CEO Jensen Huang suggesting that the technology could be 20 years or more away from becoming commercially widespread.
While IONQ has mostly recovered from this blow, its fundamentals today aren’t massively different from where they were six months ago. The fact that so much volatility can result from a small shift in investor sentiment underlines just how speculative IonQ and other quantum startups could be, especially at their current prices.
So, while IONQ may keep rising, investors may be wise to expect slower returns from this point forward alongside the potential risk of high volatility. With so much of the stock’s value based on what could be quite distant future earnings, IonQ looks like a highly speculative investment today, despite the impressive achievements the business has made as a pioneer in quantum computing.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.