Quantum computing startup IonQ (NYSE:IONQ) has seen its stock skyrocket by over 380% in the last 12 months, prompting comparisons to the extreme gains NVIDIA produced as AI technology took off.
While there certainly are some parallels between the two companies, there are also some fairly stark differences. Is IonQ the next NVIDIA, or is the stock rising more on hype than on real-world performance?
How Are IonQ and NVIDIA Similar?
On the surface, there are considerable similarities between IonQ and NVIDIA. Like NVIDIA did with AI hardware, IonQ has invested heavily in developing cutting-edge quantum computing hardware in hopes of getting out in front of what could be a revolutionary technological development.
Another parallel is that IonQ is attempting to build a moat for itself by bridging its quantum hardware with equally valuable software. This is very similar to the programming moat that has sprung up around NVIDIA as its development ecosystem became the default in the world of AI.
Here, it’s also useful to discuss the parallels between AI and quantum computing. Just as AI has the potential to unlock vast new value from data and increase productivity, quantum computing could one day unlock almost unimaginable gains in computing speed.
Though it’s very difficult to put an exact number on a technology that still hasn’t achieved commercial use, many analysts estimate the value of quantum computing to be in the trillions of dollars as soon as the 2030s. Needless to say, the companies that come to dominate this market could become extremely valuable as a result.
Is IONQ Overvalued?
One of the most interesting lessons NVIDIA showcased was the fact that a business successfully dominating an explosive new high-tech growth industry could maintain valuations that would leave practically any other business extremely overvalued. Though the ratio has come down to a much more reasonable level as earnings have grown, P/E ratios in the upper double-digit and lower triple-digit range weren’t unusual for NVIDIA in the early 2020s.
With that said, it’s difficult to disregard just how high the price of IONQ shares is at the moment. Even without earnings, the stock is priced at over 200 times sales and 13 times book value. With earnings likely quite a way in the future, these multiples do suggest that IONQ is overvalued at current prices. Even the small crop of generally quite bullish analyst forecasts suggests that IONQ has reached full valuation after its massive surge during the last year.
The Key Reasons IonQ Probably Isn’t the Next NVIDIA
What could be described as the trillion-dollar difference between IonQ and NVIDIA is the fact that AI is already a commercially proven and viable technology, whereas quantum computing is likely still years away from reaching that point.
Even before the explosion of AI, NVIDIA was generating modest profits from selling its chips. In other words, the business was already running successfully, and the AI boom provided it a new opportunity that allowed it to become one of the largest businesses in the world.
IonQ’s focus on quantum computing, by contrast, is far more speculative. Commercially viable quantum computing may not come about until the second half of the next decade. Even if the technology advances at a substantially faster pace, IonQ would likely be many years away from achieving net profitability. This would seem to suggest that the run-up in IONQ shares may be premature. It’s also possible that advances in classical computing could reduce the comparative advantages of quantum computing between now and then. If that happens, the market opportunity may not be as large as early quantum computing bulls expect.
Another difference between IonQ and NVIDIA is the fact that IonQ will likely have to compete directly with some of the world’s biggest tech companies in the race to commercialize quantum computers. Alphabet has been particularly active in this area, developing its own advanced quantum chips.
The key difference, of course, is that Alphabet can pour far more capital into quantum development and wait for returns as its massive search, cloud computing and AI business portfolio continues to deliver strong cash flows.
Indeed, IonQ’s CEO has even floated the idea that a much larger company could acquire the quantum computing startup.
While the company’s CEO projected an extremely unlikely acquisition valuation in the hundreds of billions, the fact that management is thinking about being acquired further underlines the advantage larger, better-capitalized businesses like Alphabet have.
Although NVIDIA certainly could have gone looking for a buyer, the company was more valuable to shareholders on its own and has always operated as such.
Finally, it’s worth remembering that IonQ isn’t the only startup attempting to commercialize quantum computing technology.
Rigetti Computing, for example, has gone so far as to introduce a commercially available quantum processor, a move that could help it establish an early lead in quantum computing research. As such, IonQ isn’t just competing with the big tech companies but also with other agile, innovative startups that are working along similar lines.
Is IONQ a Buy Today?
Between competition from tech majors, a sky-high valuation and an uncertain timeline for its technology to become commercially viable, IonQ looks like a significantly risky investment at the moment. While some highly risk-tolerant investors may decide to invest in the company as a long-term play on quantum computing, more conservative investors may prefer to wait for a clearer picture to emerge on both quantum computing in general and IonQ’s market position in particular.
Indeed, there’s even a decently strong possibility that IonQ could be in a bit of a bubble. With its extremely high valuation, it wouldn’t take much in the line of negative news for the stock to reverse some of the gains it has delivered in the past year.
This dynamic was on display in January when NVIDIA CEO Jensen Huang’s comments about a long timeline for quantum viability caused a multi-billion dollar selloff among IonQ and other quantum startups. With such a speculative investment thesis, IonQ and startups like it could be especially prone to similar selloffs in the future.
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.