Nvidia's (NVDA 1.53%) stock has rallied about 1,110% over the past five years, turning it into the world's first trillion-dollar chipmaker. A large portion of that rally was fueled by the explosive growth of the artificial intelligence (AI) market, which drove more companies to buy Nvidia's high-end data center chips for processing AI tasks.
Nvidia might still have room to run, but it's asking a lot for a $1.2 trillion company to generate even bigger multibagger gains. Therefore, many investors are already likely seeking out the "next Nvidia" -- a company that is exposed to the same secular AI tailwinds but has more upside potential. Could the quantum computing company IonQ (IONQ 3.47%) check all the right boxes?
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A pure play on quantum computing
Unlike traditional computers, which process data with binary "bits" of zeros and ones, quantum computers can store zeros and ones simultaneously in "qubits" to process data at much faster rates. However, quantum computing systems are also much larger, more expensive, and more prone to making mistakes than traditional computers.
IonQ aims to resolve those issues with a "trapped ion" architecture that enables it to produce much smaller qubit processing unit (QPU) systems than its competitors. Its QPU system is only two inches wide, while IBM's refrigerated casing for a single QPU is about six feet wide. Alphabet's Google has also been developing a QPU system, which is about 20 feet wide.
This company measures its quantum processing power in algorithmic qubits (AQ). It reached AQ 29 earlier this year -- seven months ahead of its original goal -- and plans to reach AQ 35 in 2024, followed by AQ 64 in 2025. It expects to reach AQ 1,024 by 2028. That would represent a compound annual growth rate (CAGR) of 104% in its quantum computing power, or roughly doubling the qubits each year.
IonQ serves up that computing power as a cloud-based service through Amazon's quantum cloud computing service Braket, Microsoft's Azure, and Google Cloud. It only generated $3 million in revenue in 2021, but that figure jumped to $11 million in 2022 as it secured more contracts. Management expects IonQ's revenue to rise 93%-100% to $21.2-$22.0 million in 2023.
NYSE: IONQ
Key Data Points
Is IonQ an AI play like Nvidia?
Nvidia's GPUs are well suited to process AI tasks because they use vector processing, which processes a wide range of integers and floating point numbers simultaneously. Traditional CPUs process each piece of data individually with scalar processing, which makes them less efficient at processing complex AI and machine learning tasks.
Quantum computing platforms could further accelerate that process by moving beyond binary computing methods. According to Fortune Business Insights, the quantum computing market could still grow at a CAGR of 32% from 2023 to 2030.
One of IonQ's top partners is Zapata AI, a developer of quantum-powered generative AI solutions for large organizations. Last year, Zapata, IonQ, and several of their partners received a multi-year award from the U.S. Defense Advanced Research Projects Agency (DARPA) to fund the development of new quantum benchmarking tools.
Analysts expect IonQ's revenue to rise from $22 million in 2023 to $88 million in 2025, which would represent a two-year CAGR of 100%. They don't expect it to turn profitable anytime soon, but it could narrow the company's losses as the business scales up.
Could IonQ replicate Nvidia's life-changing gains?
IonQ's stock started trading at $10.60 per share after it closed its merger with a special purpose acquisition company (SPAC) on Oct. 1. It sank to about $3 last December, but it subsequently bounced back to about $12 as of this writing.
With an enterprise value of $2.4 billion, IonQ isn't cheap at 109 times this year's sales. Even if it matches analysts' expectations over the next two years, it still trades at 27 times its projected sales for 2025. That frothy valuation, along with its persistent losses, could limit its upside potential as long as interest rates remain elevated.
But if IonQ hits its processing target of AQ 1,024 by 2028, locks in more customers, and continues to expand, it could quickly grow into its valuations. Economies of scale would then kick in and boost its margins.
I'm not confident enough to call IonQ the "next Nvidia" yet, since it has yet to successfully scale up its business and justify its sky-high valuations. However, I think this mid-cap stock could still have plenty of room to run if its trapped ion technology successfully shrinks down QPU systems and disrupts the nascent quantum computing market.
