IonQ (IONQ 9.66%) has set the stock market on fire in 2023 with eye-popping gains of 333% thanks to the hype around quantum computing. But it looks like investors are now having second thoughts about this company following its terrific surge.
Shares of IonQ are down 25% since hitting a 52-week high in September this year. While that may seem a tad surprising at first given how fast IonQ is growing, a closer look at the company's financials will tell us why investors have been cashing in some profits recently.
IonQ is very small considering the end-market opportunity it is sitting on
IonQ's red-hot rally this year is mostly a result of the hype around quantum computing, a technology that's currently in a nascent phase. IDC estimates that the global quantum computing market was worth about $1.1 billion last year. It is expected to grow to $7.6 billion in 2027, clocking an annual growth rate of 48%.
But at the same time, IDC points out that its latest forecast is lower than the previous one published in 2021 when it was forecasting the quantum computing market to generate $8.6 billion in revenue in 2027. The market research firm has lowered its forecast because of "slower than expected advances in quantum hardware development, which have delayed potential return on investment."
IDC adds that the emergence of generative AI has been another headwind for quantum computing adoption. The firm points out that investments in quantum computing will increase at a pace of just 11.5% through 2027. IDC estimates that the technology will gain broader adoption only when there is a breakthrough in quantum hardware development. Until that happens, the quantum computing market's growth will be mostly dependent on the adoption of this technology as a service infrastructure and an increase in workloads that are suitable for this technology.
On the other hand, even though IonQ is growing at a rapid pace, its business is still very small when compared to the multibillion-dollar opportunity in the quantum computing market. In the third quarter of 2023, the company reported just $6.1 million in revenue. For the full year, IonQ expects to deliver $21.6 million in revenue, which would be a huge jump of 95% over the prior year.
While that would be really impressive, it is worth noting that IonQ is just a fraction of the quantum computing market, which was worth $1.1 billion last year as per IDC. Also, analysts are expecting IonQ's growth to decelerate in 2024 before it picks up again in 2025.
IONQ Revenue Estimates for Current Fiscal Year data by YCharts
One possible reason is that IonQ itself expects the quantum computing market to enter the revenue-generating phase around 2025 and gather momentum from then on. But the stock's massive surge this year and its rich valuation suggest that the market has already priced in years of growth, which is why IonQ may have to deliver much stronger growth to keep investors happy.
The valuation is a concern right now, and it could weigh on the stock's returns
IonQ stock is trading at a whopping 152 times sales right now. By comparison, the S&P 500 index has an average price-to-sales ratio of 2.6. The following chart indicates that IonQ's stock price ran up too fast considering the revenue growth that it has been delivering.
IONQ Revenue (TTM) data by YCharts
Not surprisingly, analysts are adopting a cautious stance on how much upside IonQ stock could deliver in the coming year. According to an estimate of 12 analysts covering the stock, IonQ has a median price target of $16. This points toward a 7% jump from current levels. Also, IonQ has a forward price-to-sales multiple of 78 and it is expected to generate almost $39 million in revenue in 2024. This points toward a market cap of $3 billion after a year, which is about the same as current levels.
So, IonQ stock seems priced to perfection right now. It is richly valued and isn't expected to deliver much upside over the next year. Also, the stock's expensive valuation could drop steeply if its results don't match Wall Street's expectations. As such, investors looking to buy a growth stock may want to look elsewhere as IonQ will have to switch into a higher gear in order to regain its mojo and deliver more investor upside.
