For the last few months, a technology known as quantum computing has started receiving a lot of attention. As is often the case when new subject matter enters the spotlight, people try to figure out how to invest in this technology, which will eventually support the artificial intelligence (AI) market.
While many AI stocks have witnessed notable upticks that could be influenced by emerging enthusiasm surrounding quantum mechanics, there is one in particular that I can't stop watching.
Shares of a company called Quantum Computing (QUBT 0.62%) started to skyrocket toward the final months of 2024. However, the joyride recently came to a screeching halt after Nvidia CEO Jensen Huang commented that he thinks quantum computing technology is still decades away from becoming useful.
With shares now trading at 58% below prior highs, is Quantum Computing stock a steal for just $11 per share? Let's dig in and find out.
NASDAQ: QUBT
Key Data Points
A low share price does not always mean a low valuation
A common misconception that novice investors make is interpreting the value of a company based on its share price. For example, investors may think that because a stock is "only" $10, it's cheap and a good deal. Unfortunately, this is not necessarily the case, and thorough valuation analysis requires much more than a cursory look at a stock price.
When analyzing a business, investors should also take a look at how many outstanding shares the company has. By multiplying the number of outstanding shares by the stock price, you can determine the company's market capitalization (which is essentially the value of the business).
Right now, Quantum Computing's market cap is around $1.4 billion. This means that even though you're buying shares for the seemingly low price of $11, you're actually investing in the company at a valuation north of $1 billion.
Image source: Getty Images.
Does Quantum Computing's valuation make sense?
Expanding upon the ideas above, you're probably wondering if Quantum Computing's billion-dollar valuation is appropriate. In order to determine the answer, it's generally a good idea to look at valuation multiples.
Quantum Computing is still a company in the development stage. This means that the company is not yet consistently profitable and will likely remain a cash-burning operation that invests heavily in areas such as research and development (R&D), engineering, and marketing. For this reason, it is not reasonable to use earnings-based ratios such as price-to-earnings (P/E) or price-to-free cash flow (P/FCF). Instead, I'll defer to the price-to-sales (P/S) ratio when assessing Quantum Computing.
Over the last 12 months, Quantum Computing has generated total sales of approximately $386,000. Given the company's $1.4 billion market cap, this means that Quantum Computing is valued at more than 3,600 times its sales.
While premium valuation multiples may be warranted at times, Quantum Computing's P/S ratio of 3,600 is simply disconnected from any version of reality.
Is Quantum Computing stock a buy right now?
Quantum Computing's lack of revenue leads to a larger issue. As the chart below illustrates, Quantum Computing is burning cash at a high rate, and the company only boasts about $3.1 million in cash on the balance sheet.
QUBT Cash and Equivalents (Quarterly) data by YCharts
Given the limited use cases for quantum computing technology, as it stands today, I suspect that liquidity will remain a challenge for Quantum Computing's ongoing business efforts. My suspicion is that the company will turn to an obvious form of raising capital to keep the business afloat -- namely, issuing shares at its current bloated valuation. As such, if you buy (and overpay) Quantum Computing stock today at a $1.4 billion valuation, you'll be diluted if the company turns to issuing stock to raise cash -- as it has done in recent quarters and very well might do again.
In my eyes, Quantum Computing is far from a good buy. I think the company is quite overvalued despite the appearance of a low share price. I think investors should stay away from Quantum Computing and seek other opportunities in the AI realm.
