Quantum computing and networking startup IonQ (NYSE:IONQ) has delivered incredible returns of more than 800 percent over the last 12 months and over 80 percent in just the last month. Riding a wave of quantum computing enthusiasm among investors, IonQ and a handful of other early quantum startups have been able to deliver returns to their shareholders that have massively outperformed the broader stock market. Just why is IonQ up so much, and could the stock still be worth buying after such a massive bull run?
IonQ Production Game-Changer
This month’s rise has been driven by several key developments in IonQ’s business. Early in the month, the business announced that it had made a major breakthrough in the manufacturing of synthetic diamond films that are key components of quantum computers.
Specifically, a new method has been developed that allows these films to be manufactured with processes similar to those used in producing regular semiconductors. This development may very well be critical for helping IonQ get out in front of its competition in quantum computing.
Only about a week later, IonQ announced the creation of IonQ Federal, an initiative aimed at providing quantum computing to the US government and defense customers.
Although IonQ already had several federal government contracts, IonQ Federal aims to unify government services and provide additional resources. This move is widely believed to produce more contracts with government customers, a likely key to generating early revenue in the quantum computing space.
This announcement sparked the most recent spike in IONQ share price and the stock began trading markedly higher after the September 10th announcement.
Additional upward pressure was put on IONQ shares on September 17th, the day on which the business announced both the acquisition of quantum sensor startup Vector Atomic and a new memorandum of understanding with the Department of Energy to advance quantum satellite communications.
The Vector Atomic acquisition was particularly positive, as IonQ will now gain access to the startup’s quantum sensing patents and pool of government contracts and be able to add its team of quantum technology experts to IonQ’s existing talent pool.
Between major technical breakthroughs, strategic acquisitions and a deepening relationship with the US federal government, it’s not difficult to see why the market has been so enthusiastic about IonQ in the past month. These developments, of course, built on already-strong hype around quantum computing as a revolutionary technology with enormous disruptive potential.
Rate Cuts To Boost IONQ?
In addition to the developments outlined above, IonQ may also be receiving a bit of a tailwind from the Fed’s decision to cut interest rates and the market’s expectation of further cuts ahead. Lower interest environments tend to favor stocks with earnings growth projected far into the future, and quantum computing still isn’t expected to become viable at scale for several more years. As such, IonQ and other quantum startups will likely be a bit more attractive as interest rates decline.
Why Is IonQ Stock Up So Much?
As an early-stage business specializing in a technology that’s likely years away from true commercial viability, it’s hardly surprising that IonQ’s valuation looks extremely high at the moment. Shares of the stock now trade at over 300 times earnings and nearly 18 times book value despite a lack of positive earnings or cash flow.
IonQ has even gone beyond what has proven to be a fairly optimistic set of analyst forecasts. The average price target for the stock at the moment is $64.63. With shares now trading at $69.43, this average target implies a downside of almost 7 percent over the next 12 months. IonQ does, however, have five buy ratings, 2 hold ratings and no sell ratings, suggesting considerable bullishness among the small group of analysts covering the stock.
IonQ’s Share Dilution
One of the major problems investors may find with IonQ is its habit of diluting its shares at a fairly rapid rate. A year ago, IonQ only had about 210 million outstanding shares. Today, that number has risen to over 250 million. This trend is likely to continue, as IonQ has been using its highly valued stock for acquisition purposes. Vector Atomic’s acquisition, for example, is being conducted as an all-stock transaction.
Is IonQ a Buy Now?
Although IonQ has massively outpaced the market over the last year, there are some very real questions about whether it can keep producing such lofty returns.
Chief among the problems IonQ faces is the fact that it trades at an astronomical P/S ratio despite specializing in a technology that likely won’t reach its full commercial potential for several years to come. The fact that IonQ has shown a willingness to substantially dilute its shares in the meantime raises questions about how much dilution today’s investors could experience before IonQ can catch up to its sky-high valuation.
It’s also worth noting that IonQ is far from alone in the quantum computing space. Other startups have seen even larger jumps in share prices than IONQ, indicating a general environment of possible overvaluation.
Rigetti Computing (NASDAQ:RGTI), as an example, is up over 4,200 percent in the last 12 months and is valued at over $10 billion despite generating revenue of less than $11 million. Tech giants like Alphabet and Amazon, meanwhile, are also working on cutting-edge quantum computing projects. The larger resources these businesses have at their disposal could easily put them out in front in the quantum race, introducing yet another layer of competitive risk for IonQ and other startups.
While quantum computing likely has huge long-term potential, it seems likely that IonQ shares could be both overvalued and quite risky at the moment. Most of the hype around the business and the stock appears to rest on assumptions about earnings that could be many years in the future.
In the meantime, investors face the potential risks of further share dilution and competition from both other startups and some of the world’s largest tech giants. Taking all of this into account, IonQ may carry too many risks for most investors at the moment.
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.