IonQ (NYSE:IONQ) is a quantum computing startup that has focused on developing trapped-ion quantum computers to meet the next generation of computing needs. Since it went public, shares of IonQ are up nearly 450 percent, including a gain of almost 300 percent in the last 12 months alone.
Is IONQ stock in a bubble after this meteoric rise, or could there still be upside potential in IonQ as quantum computing gets closer to real-world viability?
How High Has IONQ’s Valuation Gone?
Despite never having turned a profit, IonQ shares have risen to nearly 260 times their trailing 12-month sales, allowing the business to achieve a market cap of over $17 billion on revenues of only $43.1 million. While not as high as the P/S ratio, IonQ is also trading at over 15 times its book value.
To get a sense of just how highly valued IonQ is, consider the fact that the business itself has offered an optimistic projection of $1 billion in sales by the year 2030. While this would represent massive growth from its current revenue, it still places IONQ shares at over 17x its projected sales in five years’ time.
IonQ also expects to turn its first profit in 2030, meaning that whatever earnings it can generate must be discounted back by at least half a decade to arrive at a net present value.
With all of this said, it’s important to note that analysts remain, on the whole, positive about IONQ. The consensus price target for the stock is $64.63, representing an upside of about 9 percent from the last close of $59.37. Even so, this may not be enough to entice investors when IONQ’s valuation is already looking hard to sustain.
IonQ’s High Risks
IonQ presents significant risks for investors in addition to an extreme valuation that could set it up for a correction. One of the most crucial of these, considering the business’s long timeline for achieving profitability, is the risk of share dilution.
Since going public in 2021, the number of outstanding IonQ shares has risen from about 190 million to over 250 million. Considering that IonQ may need to keep raising capital for several years to fund cutting-edge R&D efforts, it’s far from impossible that investors could see their shares diluted significantly more before the business can become profitable.
It’s also worth noting that IonQ, like other quantum computing startups, could find itself facing competition from much larger businesses that are able to invest many times more into research and development. Alphabet, for example, has very recently announced achieving the first-ever verifiable quantum advantage using its Willow quantum processor, a milestone that could pave the way for real-world applications of quantum computing.
How Speculative Is Quantum Computing in General?
Looming above IonQ’s individual performance are larger questions about quantum computing itself. While some very impressive technical strides have been made in the past few years, the technology is still far from widespread commercial viability.
Even with Alphabet’s recent demonstration of confirmed quantum advantage, quantum computers may not be widely used in the real world until sometime in the middle of the next decade.
Even when real-world applications become feasible, quantum computing will still likely be too expensive for all but a handful of massive businesses and government entities to make use of at first. Leading quantum computers cost tens to hundreds of millions of dollars and are extremely expensive to operate once they’ve been built. As such, the initial commercial base could be quite limited.
Taking these factors into account, as well as the engineering challenges posed by making stable, reliable quantum computers, it’s extremely difficult to determine how valuable the technology will ultimately become and what kind of margins quantum computing businesses can expect to earn from their revenues.
These broader questions suggest that quantum computing itself is still quite speculative, though there’s little doubt that the technology could have vast potential.
Is There Still a Bull Case for IonQ?
Needless to say, there are still some positives about IonQ as a business. As quantum computing matures, IonQ has the potential to be at the cutting edge of an extremely high-growth technology.
By 2035, analysts expect the quantum computing market could be worth as much as $72 billion, though this may be on the more optimistic side of the range of possible outcomes. As an early entrant to the market that is working on a promising type of quantum computing technology, IonQ could be a major beneficiary of this rapid growth.
Another significantly bullish factor in IonQ’s case is the fact that Amazon, itself a potential leader in quantum computing, has invested directly in IonQ. It’s worth noting, however, that this investment is modest, equating to only 0.3 percent of IonQ’s shares. Though Amazon’s backing is certainly meaningful, its ownership stake in IonQ is too small to have much effect on share prices one way or another.
Finally, IonQ is already making several positive moves that could position it for long-term success. In its Q2 report, for example, IonQ detailed two new memoranda of understanding with entities in South Korea and Japan, showing its growing global presence in quantum computing. IonQ was also able to beat its own revenue guidance by 15 percent, though this still only saw quarterly revenues rise to $20.7 million.
So, Is IonQ In a Bubble?
While there could be real long-term potential in IonQ’s business, the stock may well be in a bubble at this point. Considering that it’s priced at a massive premium to sales and earnings that even management doesn’t expect to materialize for another half a decade, there seems to be a significant disconnect between IonQ’s valuation and its intrinsic value as a business. Moreover, current prices don’t seem to fully reflect the competitive risks and potential for delays IonQ may face.
Finally, it’s worth considering that IonQ stock isn’t in a vacuum but is one of several quantum computing startups exhibiting bubble-like behavior. Rigetti Computing, for example, is a closely related quantum startup whose shares are now trading at an even more extreme 1,243 times trailing 12-month sales. As such, it may be more accurate to say that quantum computing stocks, rather than just IonQ individually, are likely in a bubble at today’s prices.
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.